Learning Objectives

recognize the pros and cons of using tariffs versus quotas. Learn how tariffs differ from quotas in their protective effects in the confront of sector changes.

There room two an easy ways to carry out protection to domestic import-competing industries: a tariff or a quota. The selection between one or the various other is likely to depend on several concerns.

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One concern is the revenue effects. A tariff has an immediate benefit for federal governments in the it will immediately generate tariff revenue (assuming the tariff is not prohibitive). Quotas might or may not generate revenue depending upon how the quota is administered. If a quota is administered by selling quota ticket (i.e., income rights), then a quota will certainly generate government revenue; however, if the quota is administered top top a first-come, first-served communication or if quota ticket are provided away, climate no revenue is collected.

Administrative prices of tariffs and quotas are likewise likely come differ. Tariff collection involves product identification, collection, and processing the fees. Quota management will also involve product identification and also some method of keeping track of, or counting, the product as it enters the country in multiple port of entry. That may also involve some technique of auctioning or disbursing quota tickets. It is not obvious which of these two actions would be less costly, back a great guess would be tariff collection.

Perhaps the most important difference between the 2 policies, however, is the protective effect the policy has on the import-competing industries. In one sense, share are much more protective of the residential industry due to the fact that they limit the degree of income competition to a solved maximum quantity. The quota provides an upper bound to the international competition the residential industries will certainly face. In contrast, tariffs just raise the price however do no limit the degree of competition or trade volume to any particular level.

In the initial General commitment on Tariffs and also Trade (GATT), a choice for the applications of tariffs quite than share was introduced as a guiding principle. One factor was the feeling that tariffs allowed for more market flexibility and thus can be supposed to be much less protective over time. Another reason pertained to transparency. V a quota in place, the is very challenging to discern the degree to i m sorry a market is protected since it can be complicated to measure up how far the quota is below the totally free trade income level. With a tariff in place, particularly an ad valorem tariff, one can use the tariff portion as a measure up of the degree of protection.

Also, it was considered somewhat easier to negotiate reductions in tariff rates than quota increases during GATT ring of profession liberalization. Again, the worry of transparency arises. Trade liberalization agreements typically target a fixed portion for tariff reductions. For example, countries might agree come reduce typical tariffs by 30 percent native their existing levels. This rule would be perceived as being same reciprocation in that each nation would be liberalizing come the exact same degree. For this reason the agreement can be judged to it is in fair. However, with quotas in place, it would be difficult, if no impossible, to use such a straightforward form of same principle.

For this reason, current civilization Trade company (WTO) member nations agreed in the Uruguay round to phase out the use of quotas, used primarily in farming industries. Instead, nations will use tariffs the are equivalent in your market effects to the original quotas. This convey is referred to as tariffication. In this way, future ring of profession liberalization negotiations will be able to use fair mutual concessions to bring these tariffs down further.


The Protective results of Tariffs versus share with industry Changes

One the the main comes to in choosing in between tariffs or quotas is the protective result of the policy. Although tariffs and also quotas are usually equivalent come each various other in regards to their static price and also welfare effects, this equivalence walk not remain true in the face of sector changes. In the next sections we consider three such industry changes: an increase in residential demand, rise in domestic supply, and also a to decrease in the civilization price. In every case, we compare the protective impacts of a tariff and a quota because that the domestic import-competing industries.


An increase in residential Demand

Consider figure 7.28 "Effects of a demand Increase", i m sorry depicts a little importing country. PFT is the free trade price. If a tariff the T is put into place, the domestic price rises to PT and also imports same DTST. A quota collection equal to QT (the blue line segment) would certainly generate the same increase in price come PT and the exact same level of imports. Therefore the tariff T and quota QT are claimed to be tantamount to every other.


Figure 7.28 impacts of a demand Increase

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Next, take into consideration the results in this industry when there is an increase in domestic demand, represented by a rightward change of the need curve. A demand increase could arise since of rising incomes in the country or because consumers’ choices become more favorable come this product.

With a tariff in location initially, the boost in domestic demand will leave the domestic price unaffected. Due to the fact that this is a small country, the world price go not change and therefore the residential tariff-inclusive price stays at PT = PFT + T. Residential supply also remains at ST, but demand rises to DT, causing rise in imports to DTST.

With a quota in location initially, the rise in residential demand causes the residential price to climb to PQ in bespeak to maintain the import level at QT (the higher blue line segment). Domestic supply will increase with the increase in price (not labeled), if domestic need will fall.

The protective result of the tariff or quota means the level to i beg your pardon the domestic producers are safeguarded in the face of the sector change. Since the residential price rises much more with the quota in location than through the tariff, domestic producers will reap a larger supply and also consequently a greater level the producer surplus (not shown). Hence the quota is much more protective 보다 a tariff in the confront of boost in domestic demand.


An boost in residential Supply

Again, consider a small importing country. In figure 7.29 "Effects of a it is provided Increase", PFT is the complimentary trade price. If a tariff the T is put right into place, the residential price rises to PT and imports same DTST. A quota set equal come QT (the blue line segment) would generate the same boost in price to PT and the very same level the imports. Thus the tariff T and quota QT are stated to be tantamount to every other.


Figure 7.29 results of a supply Increase

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Next, take into consideration the impacts in this industry when over there is boost in domestic supply, stood for by a rightward shift of the supply curve. A it is provided increase can arise due to the fact that of falling production prices or as result of improvements in productivity.

With a tariff in place initially, the increase in residential supply will leave the residential price unaffected. Due to the fact that this is a small country, the human being price walk not adjust and therefore the residential tariff-inclusive price stays at PT = PFT + T. However, due to the fact that domestic it is provided is now higher at every price, at the price PT, supply equates to domestic need of DT. This means that through the tariff, imports are lessened to zero.

With a quota in location initially, the rise in residential supply reasons the domestic price come fall back to the complimentary trade level in stimulate to maintain the income level in ~ the level QT (the reduced blue line segment). Domestic supply will increase to SQ with the to decrease in price, while domestic demand also will rise to DQ.

Since the domestic price rises more with the tariff in place than through the quota, domestic producers will gain a bigger supply (DT vs. SQ) and consequently a higher level that producer surplus (not shown). Therefore the tariff is an ext protective than a quota in the challenge of boost in domestic supply.


A diminish in the world Price

Again, think about a tiny importing country. In figure 7.30 "Effects of a civilization Price Decrease", PFT is the complimentary trade price. If a tariff the T is put into place, the domestic price rises to PT and imports equal DTST. A quota set equal to QT (the blue line segment) would generate the same boost in price to PT and the same level of imports. For this reason the tariff T and also quota QT are claimed to be equivalent to every other.


Figure 7.30 results of a people Price Decrease

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Next, think about the impacts in this sector when over there is a diminish in the world free trade price, stood for by a downward shift from PFT to PFT. The civilization price can fall because of falling civilization production expenses or as result of improvements in international productivity.

With a tariff in place initially, the to decrease in the human being price will reason a palliation in the domestic price. Since this is a little country, once the civilization price falls, the domestic tariff-inclusive price also falls to PT = PFT + T. V the lower price, residential supply falls to ST, while domestic need rises come DT. This method that through the tariff in place, imports increase to DTST.

With a quota in ar initially, the decrease in the world cost-free trade price has no result on the residential price. The residential price continues to be at PT due to the fact that this is the just price the will assistance the quota QT.

Since the residential price is higher with the quota in ar than through the tariff, domestic producers will gain a larger supply (ST vs. ST) and consequently a higher level of producer surplus (not shown). Hence the quota is an ext protective 보다 a tariff in the face of a decrease in the world cost-free trade price.


The general Rule

What we can conclude from the three examples above is the when market conditions readjust such the imports increase, a quota is much more protective than a tariff. This will occur if domestic need increases, residential supply decreases, the civilization price falls, or if some combination of these things occur.

In situations where sector changes reason a decrease in imports, a tariff is an ext protective 보다 a quota. This occurs if domestic demand falls, domestic supply rises, the civilization price rises, or some mix of these transforms occurs.

Since protection is often listed due to the insistence the the domestic import-competing industries—rather than a much more comprehensive issue for the basic welfare of the country—and since import-competing firms are generally an ext concerned around situations whereby imports may increase, sector preferences commonly favor quotas over tariffs due to the fact that quotas will certainly be an ext protective in this situations. Other government concerns, such as revenue needs, lull of administration, or joining in profession agreements prefer the GATT/WTO, i m sorry contain a choice of tariffs end quotas, have actually resulted in the prevalent application that tariffs quite than share in many instances.


Key Takeaways

The effects of tariffs are an ext transparent 보다 quotas and also hence room a preferred type of protection in the GATT/WTO agreement. A quota is more protective the the domestic import-competing market in the confront of import volume increases. A tariff is much more protective in the confront of import volume decreases.

Exercises

Draw a diagram portraying a little importing country with a nonprohibitive income tariff (T) in place. Top top the diagram suggest the tariff rate and also the indistinguishable import quota (Q) that would certainly generate the same residential price.

Next, mean there is a to decrease in domestic need for the good.

indicate on the graph the new equilibrium through the tariff in place and also the quota in place. Show the brand-new level that imports with the tariff and the quota. Which is larger? show the brand-new domestic price through the tariff and also the quota. I beg your pardon is higher? which is an ext protective the the residential import-competing industry in this situation, a tariff or quota? define why.

Draw a diagram illustrating a little importing country with a nonprohibitive import tariff (T) in place. On the diagram indicate the tariff rate and also the tantamount import quota (Q) that would certainly generate the same residential price.

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Next, intend there is boost in the world price of the good.

show on the graph the new equilibrium with the tariff in place and the quota in place. Indicate the brand-new level the imports v the tariff and the quota. I m sorry is larger? suggest the new domestic price with the tariff and also the quota. I beg your pardon is higher? i m sorry is more protective that the residential import-competing market in this situation, a tariff or quota? explain why.