Suppose Home country threatens to impose a quota on imports of a good from Foreign country. In response, Foreign country unilaterally agrees to limit exports to Home country. This will have the effect of

Question

BlackTom AI · Accepted Answer

Restating the scenario: Home country fears a quota on imports from Foreign country, so Foreign country unilaterally agrees to limit exports to Home. The question asks about the effect of this arrangement.

Note: The provided data includes only one answer option and no list of alternatives to compare against. We will analyze the given option in isolation and explain why it is a plausible outcome, while also noting the missing context.

Option under consideration: 'creating a bigger deadweight loss on Home country than if Home had simply imposed a tariff.'

Why this could be true: When a foreign country voluntarily restricts exports (a quota) to Home, the Home country faces a higher domestic price for the imported good than under free trade, and quantity imported is constrained. A key difference between a quota and a tariff is the allocation of rents and the source of government revenue. Under a tariff, the government collects tariff revenue, which partly offsets the welfare loss to consumers. Under a quota, the revenue does not necessarily accrue to the Home government; it instead goes to foreign exporters or import license holders, depending on quota design. This can enlarge the overall deadweight loss (DWL) in Home because consumer surplus falls, producer surplus may rise, but the loss in total surplus is often greater when tariff revenue is absent or captured by foreigners. Consequently, for a given level of imports, a quota can generate a higher DWL than a tariff, especially if the quota rents do not translate into compensating transfers or efficiency gains within Home.

Why this reasoning might be contested: The exact comparison between a tariff and a quota depends on the specific incidence of the policy, the elasticity of supply and demand, and how the quota rents are allocated. If the tariff revenue is used to offset other distortions or if the quota rents are redistributed domestically in a way that reduces DWL, the magnitude of the DWL relative to a tariff could differ. Additionally, if the tariff is implemented with revenue recycling that offsets some losses, the DWL advantage of one instrument over the other could change.

In sum, given standard partial-equilibrium considerations, a voluntary foreign quota that constrains imports can create a larger deadweight loss for Home than a tariff would, because the absence of tariff revenue within Home (and the possible transfer of rents to foreign producers) tends to increase the overall efficiency losses from the trade restriction.

Suppose Home country threatens to impose a quota on imports of a good from Foreign country. In response, Foreign country unilaterally agrees to limit exports to Home country. This will have the effect ofSingle choice

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Suppose Home country threatens to impose a quota on imports of a good from Foreign country. In response, Foreign country unilaterally agrees to limit exports to Home country. This will have the effect ofSingle choice

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How would you describe the main difference between import tariff and quota? Select one – the most appropriate answer.

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In a small, open economy, domestic demand for calculators is given by P = 66.1 – Q, domestic supply is given by P = 3.1Q and the world price is $6.4. The economic advisors of the country decide to impose a tariff of $6. What quota will have the same impact as the tariff?

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If a small country imposes a quota, its deadweight loss will be identical to what it would face if it had imposed a comparable tariff as long as either the government or .