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The main difference between imposing a tariff and handing out licenses under an import quota is that a tariff increases a. consumer surplus. b. producer surplus. c. international trade. d. government revenue.
Principles of Macroeconomics (Mind...
Principles of Macroeconomics (Mind...
The main difference between imposing a tariff and handing out licenses under an import quota is that a tariff increases
a. consumer surplus.
b. producer surplus.
c. international trade.
d. government revenue.
Explanation of Solution
International trade is the exchange of goods and services between different nations in the world. The exchange will take place where the two main processes are exports and imports. Exports are the sale of domestic goods to foreigners and imports are the purchase of foreign goods by the domestic country.
Option (d):
When the quota is determined, the importing will be limited to the quota quantity. The economy cannot import above the quota limit; this will help domestic producers. But when the quota is replaced by the tariff, it will increase the price of the commodity and the revenue of the government. It also reduces the quantity of imports due to increased prices. Thus, both the quota and the tariff do the same work but the tariff increases the government revenue; this is the main difference between the two. Thus, option ‘d’ is correct.
Option (a):
When the quota is determined, the importing will be limited to the quota quantity. The economy cannot import above the quota limit; this will help the domestic producers. But when the quota is replaced by the tariff, it will increase the price of the commodity and the revenue of the government. It also reduces the quantity of imports due to increased prices. Thus, both the quota and the tariff lead to a reduction in imports which reduces the consumer surplus, and so option ‘a’ is incorrect...
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