Question

Under what conditions could an import quota and tariff have exactly the same effect in price and bring the same gains and losses (give a tariff level that restricts import just as much as quota would)?

Answer 1

Tariff and quota both form the restriction imposed to reduce foreign competition or lower the number of goods imported. A surcharge is a type of tax charged on the imported goods, while a quota is the fixation of goods that could be imported. The tariff will lead to the rise in the revenue of the monitoring authority in the form of tax collected, while quota will not lead to any such change in the government's revenue. It is given that a tariff level restricts the imports just as much as the percentage would; therefore, the impact of tariff and quota in this scenario will be the same for both consumer and producer, but the overall effect of this in the economy will not be the same. The tariff will raise the revenue of the government and therefore lead to a lower deadweight loss in the economy. Still, quotas will not increase the payment, and it will lead to a more significant deadweight in the economy. The same impact on price and gains and losses is possible only if the country's monitoring authority is also selling the quota licenses. The sale of quota licensing through the auction will also generate revenue to the government, and therefore, this will lead to the same level of gain and loss to the country, which could be traced by imposing tariffs.