Tarrif and quota exam question Flashcards
(12 cards)
(a) What are the welfare effects of a tariff versus a quota in a small country, using diagrams?
Both raise domestic prices above world price (Pw), reduce imports, and alter surplus. Consumer surplus falls (a + b + c + d), producer surplus rises (a), and deadweight loss is b + d. Tariff: area c is government revenue. Quota: area c becomes quota rent, possibly going to importers or foreign firms. Conclusion: tariffs retain public benefit, quotas may not.
(a) Why is a tariff generally preferred over a quota from a welfare perspective?
Tariffs generate transparent government revenue (area c), while quota rents may be captured by firms or foreign producers. Tariffs are less prone to corruption, more responsive to market signals, and promote equity. Conclusion: Tariffs are more efficient, equitable, and transparent.
(b) If world prices fall, why would producers prefer a quota over a tariff?
Tariffs fall with world prices, reducing domestic protection. Quotas fix import volume, keeping domestic prices high. Conclusion: Quotas insulate domestic producers from global price drops, preserving their profits.
(b) Give a real-world example where producers benefited from a quota despite falling world prices.
U.S. sugar quota: world prices dropped, but quotas kept domestic prices high. Domestic producers maintained high profits, consumers paid double. Conclusion: quotas can shield producers from market volatility at consumers’ expense.
(c) If domestic demand increases, why would consumers prefer a tariff over a quota?
Tariffs allow more imports, moderating price rises. Quotas fix supply, causing sharp price spikes. Conclusion: Consumers fare better under tariffs during demand growth due to market flexibility and smoother price adjustments.
(c) How does fixed quantity under a quota cause greater harm to consumers when demand increases?
Quotas create perfectly inelastic supply at the quota limit. Rising demand drives prices up dramatically. Tariffs allow quantity to adjust, buffering consumers. Conclusion: Quotas amplify consumer harm during demand surges.
(c) What is the long-term impact of tariffs vs quotas on market flexibility and efficiency?
Tariffs are responsive to changes and preserve competitive pressure. Quotas are rigid, encourage rent-seeking, and inhibit innovation. Conclusion: Tariffs support dynamic adjustment and economic efficiency; quotas lock in inefficiency.
(b - Reverse) If world prices rise, would a producer prefer a tariff or a quota for protection?
If world prices rise, tariffs increase domestic prices further (Pw + tariff), enhancing producer surplus. Quotas still limit quantity, but domestic prices may not rise as much. Conclusion: Tariffs offer expanding protection with rising world prices, making them more favorable to producers in this case.
(b - Reverse) Why might quotas offer less benefit than tariffs when world prices rise?
Quotas fix import quantity, limiting further domestic price increases even if world prices rise. Tariffs add directly to world prices, amplifying protection. Conclusion: Tariffs scale with global price trends; quotas are static, giving less additional benefit to producers.
(c - Reverse) If domestic demand decreases, would a consumer prefer a tariff or a quota?
With falling demand, tariffs allow import volume and prices to adjust downward. Consumers may benefit from lower prices. Quotas restrict supply, keeping prices high even with weak demand. Conclusion: Tariffs give consumers more price relief during demand drops.
(c - Reverse) How do quotas harm consumers when demand falls?
Quotas create artificial scarcity. Even if demand drops, supply is restricted, preventing prices from adjusting down. Consumers pay more than necessary. Conclusion: Quotas reduce consumer surplus even in soft markets due to inflexible supply caps.
(c - Reverse) Why are tariffs more flexible than quotas during falling demand?
Tariffs maintain price links to world markets. If demand falls, imports and prices fall too, benefiting consumers. Quotas prevent this adjustment, keeping prices artificially high. Conclusion: Tariffs allow efficient price transmission; quotas do not.
