Suppose the government wants to limit imports of a certain g

Suppose the government wants to limit imports of a certain good. Is it preferable to use an import quota or tariff? Why? Use graphs to support your explanation. (15 markahlmarks)

Solution

There is no difference in the domestic consumer and producer surplus when it comes to either import quotas or tariffs. In both the cases, there will be a loss in the total domestic surplus. In fact, in case of a tariff, the revenue which is equal to the tariff times the quantity of imports can be earned by the government and this earned revenue can be redistributed in the domestic economy to accommodate some of the losses occurred in the form of domestic deadweight loss. Therefore when a tariff is imposed, the economy faces lesser economic losses.

When we talk about import quota, the difference between the domestic and world price times the quantity of imports can be captured by the foreign producers. This in case of import quotas, the domestic economy faces a loss as a whole, If the attempts are made by the government to control the losses to the domestic welfare, it should adopt tariff in place of quota.