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Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364

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BuyFindarrow_forward

Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364
Textbook Problem

Show graphically that for any tariff, there is an equivalent quota that would give the same result. What would be the difference, then, between the two types of trade barriers? Hint: It is not something you can see from the graph.

To determine

To draw: The graph showing quota for any tariff of same amount and difference between both barriers.

Explanation

Import quota is a quantitative barrier to trade through which government restricts the quantity of import of a certain commodity to protect domestic producers from foreign competition.

Tariffsare quantitative barrier to trade. In this case, the government imposes a charge on import of foreign goods that increases the import prices for those goods.

Theoretically, for every tariff rate, there exists and equivalent amount of import quota that produces the same after barrier imposition import quantity and domestic price of imported good.

Consider the diagram below. Here,

PH: Home Price of imported good

Pw: World Price of imported good

PF: Price of imported good in exporting country

D0: Demand for imported good in home country

S0: Supply of imported good in home country

S0 +quota : Supply of imported good in home country after imposition of import quota

As shown in the diagrams below, a tariff imposition of PH-PF raises the domestic price of import good to PH and after tariff import quantity is Q1Q2...

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