Tariff and import quota, both are the measure to interfere the trade between the borders. And has been a strongly applied instrument in international trade. These have positive as well as negative effects on the consumer or producer surplus and thus have a significant implication in nations welfare
Tariffs are the taxes that are imposed by the government of the country on the exported or imported products; they could be ad valorem or non-ad valorem. Tariff has direct co-relation with the government revenue and increases the GDP of the country. Whenever, the tariff is imposed by importing country, it increases the price of the imported products by the amount of tariff levied, and the demand for the domestic products increased, which ultimately increases its price, the virtue of which an increase in the producer surplus is observed.
Similarly, government also earns revenue from the increased tariff on the goods traded whereas, consumers are worse off, due to increase in the price, the values of the consumer surplus decreases. Here some portions of the loss in the consumer surplus go as government revenue and some into the producers as their surplus. But still, some portion of the consumer losses remains stack, called deadweight loss. So, in overall, the welfare of the small country falls whenever tariff is increased. But when the tariff is imposed by the big country having their bigger market size, it initially increases the domestic price of the goods making it uncompetitive, so the goods are now traded to other countries, these oversupply of the commodity in the global market drastically reduces its price. The consumer surplus of the importing country (large country) falls whereas the producer surplus increases and the government also earn revenue from the increased price. In fact, the larger countries if are able to generate greater amount of revenge against the deadweight loss, than tariff seems to be a feasible option to them conditioning that the exporting country does not reacts.
Whereas, quotas are the limitation that the government imposes in the export or the import of the product. Both in the case of the small and large economy, government has no revenue earnings from the quota but the traders gain from this quota. The deadweight loss in case of the quota will be the net effect of negative production efficiency loss and negative consumption efficiency loss. Whenever, import quota is activated in an economy, due to the decline in the availability of product for the consumption the price of the products rises until quantity supplied domestically at the higher price plus the amount of imported allowed under the quota exactly equals the quantity demanded.
Though the market effects are similar to that of the tariff, the welfare implication is different. As previously stated, the government does not earn any revenue as in the case of the tariff but in import quota, quota rent could be earned which is the difference in the value of the international and domestic price. These quota rents could be earned by the importer of the country or the foreign supplier/foreign government or by the home government itself or could be equally distributed among these. The domestic importer receives the rent if the export price is not increased by the foreign exporter or if the home government doesn’t requires an importer to buy an import license, whereas if the foreign exporter increases the price of the exporting product they will accumulate the quota rent.
Yes, the government can also capture the quota rent, if the foreign government(from the exporting country) necessitates for the exporter to buy the export licenses as a price equal to the difference in the international and domestic price of the product, the quota rent will be captured by the foreign government. The government of the importing country wishes to accrue the quota rent by selling the license to the parties wishing to import the good at the price equal to the difference between international and domestic price. These could be done through competitive auction of import license, the process called auction quota system but the administrative expenses related with the auctioning process should always be kept in mind as often it is seen that the expenses out-weights the quota rent for the importing country.
In general quota fix quantities and let the prices adjust to clear the market, whereas a tariff alters prices and lets quantities adjust. But in present scenario, the government rarely has used the quota system; they incline more towards the tariff as in the latter the revenue is directly observed by the government which could be used in various public works whereas if the quota rents happens to be enjoyed by the parties other than government of importing country, the so earned quota rents could be used for the private use on the expenses of general citizen taxes.
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