Homework SourseConsider a firm which is a monopoly producer in a country un
Solution
5)ANS-Consider a firm which is monopoly producer in a country under autarky and follows perfect competieion in free trade .That means The firm is the only one producer when the market is self -sufficient and independent.On the other hand the market is perfectly competitive when there is many competitors.
According to the question the firm should prefer the trade policies like tariff and quota.Because-
If the country imposes tariff immediately the price of the product rises to pt by the amount of tariff,as a result price of the commodity will rise.So comption will be less.This is the consumption effectof tariff.On the otherhand tariff increases the production of domestic output because higher price induces to produce more.So the import of good will be reduced and as a result revenue earned by govt. will raise.
If a country imposes quota then also the price of the product will rise to pt by the amount of quota .The role of tariff and quota is same only the difference is that quota restricts quantity while tariff works on price.The effect of both is also same but the difference is only that quota doesnot produce govt. revenue.Quota hs some disadvantage which affects the firm in market.
In that case govt. should go for tariff as quota has following disadvantages also-
1)Quota sometimes has loss in consumer well fare as quota creates monopoly profit for those with import license.So consumer surplus is convered to monopoly profit.
2)another disadvantage of quota is it has much more restrictive efect as it restricts competition.So quota may lead concentration of monopoly power among importers and exporters.
3)Quotas generate no govt. revenue .Quota leads to corruption also like bribery.In that situation tariff is acceptable as it creates govt. revenue.
4)Finaly Quota has tendency to distort the international trade much more than tariff.
Following such reasons we can say that the firm shold prefer to lobby quota not tariff.
