Since the domestic price rises more with the quota in place than with the tariff, domestic producers will enjoy a larger supply and consequently a higher level of producer surplus not shown. Thus the quota is more protective than a tariff in the face of an increase in domestic demand. Again, consider a small importing country. In Figure 7. Next, consider the effects in this market when there is an increase in domestic supply, represented by a rightward shift of the supply curve.
A supply increase could arise because of falling production costs or due to improvements in productivity. With a tariff in place initially, the increase in domestic supply will leave the domestic price unaffected. However, because domestic supply is now higher at every price, at the price P T , supply equals domestic demand of D T.
This means that with the tariff, imports are reduced to zero. With a quota in place initially, the increase in domestic supply causes the domestic price to fall back to the free trade level in order to maintain the import level at the level Q T the lower blue line segment. Since the domestic price rises more with the tariff in place than with the quota, domestic producers will enjoy a larger supply D T vs. Thus the tariff is more protective than a quota in the face of an increase in domestic supply.
The world price could fall because of falling world production costs or due to improvements in foreign productivity. With a tariff in place initially, the decrease in the world price will cause a reduction in the domestic price. With a quota in place initially, the decrease in the world free trade price has no effect on the domestic price.
The domestic price remains at P T since this is the only price that will support the quota Q T. Since the domestic price is higher with the quota in place than with the tariff, domestic producers will enjoy a larger supply S T vs. Thus the quota is more protective than a tariff in the face of a decrease in the world free trade price. What we can conclude from the three examples above is that when market conditions change such that imports increase, a quota is more protective than a tariff.
This will occur if domestic demand increases, domestic supply decreases, the world price falls, or if some combination of these things occur. In situations where market changes cause a decrease in imports, a tariff is more protective than a quota. This occurs if domestic demand falls, domestic supply rises, the world price rises, or some combination of these changes occurs.
It also restricts imports by exporting countries, which in a global market means that we are in effect restricting our exports since foreign importing countries have not earned the currency through their exports to be able to import our goods and services!
Since there are all these bad consequences - why do governments hurt their own people in this way? Politics and power - In South Africa for examples the labour unions would agitate for import restrictions to protect local businesses and save jobs. So it is in the interest of a very narrow group of employees that is seen that all others consumers and workers in other industries that now cannot produce for export , where the effect is unseen are negatively impacted.
Economics for today. Search this site. Cato Institute - Milton Friedman. Answering a case study question. Assignment Memo. Assignment: Economics 1B. The Poor. The quota creates a relative shortage and drives the price up to P2, with total output falling to Q4. The amount imported falls to the quota level.
It is this price rise that provides an incentive for less efficient domestic firms to increase their output. One of the key differences between a tariff and a quota is that the welfare loss associated with a quota may be greater because there is no tax revenue earned by a government.
Because of this, quotas are less frequently used than tariffs. Go to: Extension task. Tariffs, or customs duties, are taxes on imported products, usually in an ad valorem form, levied as a percentage increase on the price of the imported product. Tariffs are one of the oldest and most pervasive forms of protection and barrier to trade. Domestic consumers face higher prices, which also means that there is a loss of consumer surplus.
However, there is a gain in domestic producer surplus as producers are protected from cheap imports, and receive a higher price than they would have without the tariff. However, it is likely that there is an overall net welfare loss.
If a country opens up to world supply, price falls to P1, and output increases from Q to Q2. Income To government To importers. A kind of tax, which is paid on the import of goods and services. It is used as a tool to limit trade, because, tariffs increase the price of foreign goods and services and thus it makes them more expensive for the customers.
It is levied by the government to increase revenue and also to protect domestic companies against foreign competition, as the customers will get attracted by the imported goods if they are comparatively less costly.
It acts as a barrier to free trade between nations. It is a measure used in the regulation of trade volume between nations. Quotas do not generate revenues for the government, but aims at encouraging the production of goods within the country; that helps the nation to become self-sufficient and decrease dependency on imports from other countries. In this way, quota helps in reducing imports and thus, protecting own industries from foreign competition.
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