Question

Country A is a small country with respect to the world market of paper and imports paper. The government decides to impose an import quota on paper imports.

a) Under what conditions would the net welfare effect of the import quota be positive?

b) Suppose the government in country A is considering imposing an equivalent tariff instead of the import quota. Under what conditions would the welfare effects be exactly the same as in the case of a quota?

c) If the demand for paper is expected to increase, would consumers in country A perfect tariff or an equivalent quota? why?

Answer 1

A) if the small country A decides to impose quota which is below the free trade level, the supply of the important Good will decrease in that country and the demand for the domestic product will increase there. And we will see that the demand for the domestic product and the demand for the imported good is equal and this will create a net overall welfare for that small country.

B) if the government of that country decides to impose a tariff rate which will make sure that the quantity which is being imported in this case is equivalent to that of quantity in the above case the same case will repeat itself. That is the demand for the domestic good will be equivalent to that of the demand of the imported good.

C) if the demand for payment is expected to increase the consumers in country it would prefer equivalent quota because in quota the quantity is varied but in tariff the custom duty varies.