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Economics Notes On – Difference Between Tariff And Quota – For W.B.C.S. Examination.
There are various methods of protection. Most important methods of protection are tariff and quotas.Continue Reading Economics Notes On – Difference Between Tariff And Quota – For W.B.C.S. Examination.
A tariff is a tax on imports. It is normally imposed by the government on the imports of a particular commodity. On the other hand, quota is a quantity limit. It restricts imports of commodities physically. It specifies the maximum amount that can be imported during a given time period.
We can now make a comparison between tariff and quotas in terms of partial equilibrium or demand-supply approach. Fig. 5.3 illustrates the effect of tariff. The domestic supply curve is represented by SD while the demand curve is given by Dd.
These Iwo curves intersect each other at point N. And the price that is determined is known as the autarkic price or pre-trade price (PT). If trade is free, the international price that would prevail is assumed to be PW. At the international price PW, a country produces OA but consumes OB and the country, therefore, imports AB.
Governments of different countries have to intervene in the area of international trade for both economic and non-economic reasons.
Such intervention goes by the name ‘protection’. Protection means government policy of according protection to the domestic industries against foreign competition.
There are various instruments or methods of protection which aim at raising exports or reducing imports. Here we are concerned with those methods which restrict import.
Effects of Tariff
Now, if a country imposes a tariff = t per unit on its import, immediately the price of the product will rise to Pt by the amount of tariff. This increase in price has the following effects. Since the tariff raises the price, consumers buy less. Now the consumption declines from OB to OC. This is called consumption effect of tariff. The second effect is the output effect or protective effect. Tariff raises domestic output from OA to OE, this is because higher price induces producers to produce more. The third effect is the import-reducing effect.
As tariff is imposed or tariff rate is increased, import declines from AB to EC. The fourth effect is the revenue effect earned by the government. The government revenue is the volume of import multiplied by the tariff i.e., the area A’B’UR. It is a transfer from consumers to government. However, if a tariff equal to T were imposed price would have increased to PT. Consequently, imports would drop to zero. Such a situation is called prohibitive tariff.
Effects of Quota
Quotas are similar to tariff. In fact, they can be represented by the same diagram. The main difference is that quotas restrict quantity while tariff works through prices. Thus, quota is a quantitative limit through imports.
If an import quota of EC (Fig. 5.3) amount is imposed then price would rise to Pt because the total supply (domestic output plus imports) equals total demand at that price. As a result of this quota, domestic production, consumption, and imports would be the same as those of the tariffs.
Thus, the output effect, consumption effect and import restrictive effect of tariff and quotas are exactly the same. The only difference is the area of revenue. We have already seen that tariff raises revenue for the government while quotas generate no government revenue.
All the benefits of quotas go to the producers and to the lucky importers who manage to get the scarce and valuable import permits. In such a situation, quotas differ from tariff. However, if import licences are auctioned off to the importers then government would earn revenue from the auction. Under these circumstances, quotas and tariff are equivalent.
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