A government can impose an import quota or an equivalent tariff that achieves the same impact on trade. What is the key difference in the welfare outcomes of these two policy options?

Question

A government can impose an import quota or an equivalent tariff that achieves the same impact on trade.  What is the key difference in the welfare outcomes of these two policy options?

BlackTom AI · Accepted Answer

Question restatement: The prompt asks to compare welfare outcomes between an import quota and an equivalent tariff that produce the same trade impact, focusing on the key difference in welfare.

Option analysis:
Option: The government captures some of the profits from foreign suppliers through the tariff revenue.
- This statement highlights a central welfare distinction: when a tariff is imposed, the government collects revenue from the tariff, which effectively offsets part of the loss in producer and consumer surplus remaining after the trade restriction. In standard analysis, the tariff creates a wedge between domestic and foreign prices, and the revenue portion accrues to the government rather than to private foreign suppliers, reducing the total net losses to society by capturing some rents that would otherwise go to foreign producers. The presence of tariff revenue is the defining difference compared with a quota under typical non-auctioned license allocation.

Why this is the key difference: The core welfare contrast between a tariff and a quota lies in who captures rents due to restricted imports. A tariff converts part of the import rents into government revenue, shifting some surplus from consumers to the state. In contrast, an import quota (without auctioning licenses) does not create government revenue from the import restriction; instead, the rents from scarcity (the higher price and limited supply) accrue to the holders of import licenses or to foreign producers, depending on how licenses are allocated. Therefore, the presence of tariff revenue is the fundamental difference in welfare outcomes between the two policies when their effects on prices and quantities are otherwise similar.

Additional context on the surrounding concepts:
- Under a tariff, total welfare effects include consumer loss, producer gain (depending on the elasticities), and government revenue which can offset some losses, but there remains deadweight loss from the distortion.
- Under a quota with licenses allocated efficiently (e.g., via auction), some of the same rents can be captured by the government as license revenue, potentially mimicking tariff revenue, but if licenses are allocated without auction (e.g., given away for free), the rents accrue to license holders or foreign producers, not to the government.

Why other potential interpretations might be misleading:
- If one thinks the government never captures any rents under tariffs, that would ignore the explicit tariff revenue channel; tariffs explicitly transfer part of the surplus to the treasury.
- If one claims there is no welfare difference at all between the two instruments when they are set to yield the same import volume, this overlooks the distributional distinction of who captures the rents and, in cases without auctioned licenses, the different allocation of rents between domestic and foreign agents, which is central to welfare analysis.
- If the statement suggested that all rents always go to foreign suppliers under a tariff, that would misstate the mechanism: tariff revenue goes to the government, not to foreign suppliers, though price effects may still raise foreign producer surplus depending on elasticities and pass-through.

In summary, the stated option correctly identifies the key welfare distinction: tariffs channel part of the gains from restricted imports into government revenue, whereas a quota without auctioning does not generate such revenue for the government and instead shifts rents to other private holders. This rent-shifting is the fundamental difference in welfare outcomes between the two policies when their macro effects on price and quantity are matched.

ECON 4001.01 SP2025 (19496) Week 9 quiz

A government can impose an import quota or an equivalent tariff that achieves the same impact on trade. What is the key difference in the welfare outcomes of these two policy options?

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