Question

How is the quota different for Americans than a tariff?

Answer 1

An import quota will set an upper limit on the amount of imports. This will restrict imports so that there is an increase in the domestic price and hence, domestic producers experience an increased producer surplus. There is a reduction in the consumer surplus on the account of increased price and reduced quantity demanded. However, the overall economic welfare is reduced because loss to consumers is greater than the gain to producers Tariff is a restrictive trade practice that attempt to favour trade for domestic producers and raise the price for consumers. It tends to limit the amount of imports being entered in the nation. Protective tariff is aimed at reducing foreign competition for domestic firms while Revenue tariff is a tariff that is imposed for collecting revenue from foreign imports. Tariff generates revenue which goes to the government. However, once again, the overall economic welfare is reduced because loss to consumers is greater than the gain to producers and the government. Quotas are assigned to foreign producers who export in the home country and are allotted on the basis of their historic market share. In this sense we can say that import quotas transfer the same amount to the foreign producers which is forgone in terms if tariff revenue. Quotas are therefore more profitable than the equivalent tariff because the foreign producers do not face a higher tariff rate which they have to pay separately.