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 ____ .

Question

BlackTom AI · Accepted Answer

The question asks about when a quota would generate the same deadweight loss (DWL) as a comparable tariff, with a condition involving how the rents from the quota are allocated.

Option under consideration: "sells the licenses at the value of the quota rent; importers earn the quota rents".

First, recall the core concept: a tariff creates a wedge between domestic price and world price, raising domestic price and generating government revenue, while reducing imports. A quota also raises domestic prices but does not automatically generate government revenue unless the licenses are auctioned or otherwise taxed; the difference in who captures the rents (government vs. importers) affects the overall welfare impact.

Deep dive into the two parts of the option:
- "sells the licenses at the value of the quota rent": If the government sells licenses and captures the quota rents equal to the observed rent from restricting imports, the government obtains revenue equivalent to a tariff revenue. In this case, the policy outcome mirrors the tariff in terms of the wedge created and in terms of who captures rents, leading to a similar DWL.
- "importers earn the quota rents": If the rents accrue to importers (instead of the government), the distributional impact changes and the DWL can differ from the tariff because part of the rents is expropriated by private actors rather than the government. However, the standard result is that DWL will align with the tariff only if the rents are captured by the government (i.e., auctioned licenses or equivalent). When importers capture the rents, the DWL typically differs from the tariff’s DWL because the government does not gain revenue to offset some of the distortion.

Thus, the essence of the classic result is that a quota’s DWL matches that of a tariff when the rents are captured by the government (through license auctions or similar mechanisms), ensuring the tax-like revenue offset exists. If rents go to private importers, that revenue shift alters the welfare calculation and the DWL relationship to a tariff is no longer the same.

Now, evaluating the statement in the option:
- The statement ties identical DWL to a quota under the condition that the government sells licenses at quota rent value; this allocation keeps government revenue in line with a tariff and supports the equivalence in DWL. This aligns with the conventional economic reasoning.

Why other phrasing would be misleading (in general terms, since the other options are not provided here):
- If the government does not capture the rents (e.g., licenses are given away or low-cost, or rents accrue to importers), the DWL can diverge from that of a tariff because the distortion and revenue effects differ.
- If neither of these allocations occurs (e.g., some hybrid or ambiguous allocation), you cannot guarantee DWL parity with a tariff because the fundamental revenue-offset mechanism is not established.

In summary, the core idea is that the DWL of a quota matches the DWL of a tariff when the quota rents are captured by the government (through auctioning licenses or equivalent), which makes the policy outcome resemble a tariff in both price effects and revenue distribution. When rents go to private importers instead, the DWL relationship breaks down due to the shift in who receives rents and how that affects total welfare.

01:220:300:01 INTERNATIONAL ECON Qz04: Trade barriers

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 .

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