- With a given import quota, an increase in demand will result in a higher domestic price and greater domestic production and lower consumption; however, with a given import tariff, an increase in demand will increase consumption and imports. An import quota completely replaces the market mechanism while an import tariff alters it (market mechanism) allowing for adjustments in the demand for, and supply of the traded commodity.
- The second difference between an import quota and an import tariff is that the quota involves the distribution of import licenses. In this case, the government must decide the basis for distributing licenses among potential importers of the commodity. Such choices may be based on arbitrary official judgment rather than on efficiency considerations, and they tend to remain frozen even in the face of changes in the relative efficiency of various actual and potential importers of the commodity.
Furthermore, since import licenses result in monopoly profits, potential importers are likely to devote a great deal of effort in lobbying and even bribing government officials to obtain them (i.e. in so called rent-seeking activities). Thus, import quotas not only replace the market mechanism, but also result in waste from the point of view of the economy as a whole and contain the seeds of corruption.
- An import quota limits imports to the specified level with certainty, while the trade effect of an import tariff may be uncertain. This is because the elasticities of demand and supply are often not known, making it difficult to estimate the import tariff required to restrict imports to a desired level. Moreover, foreign exporters may absorb all or part of the tariff increasing their efficiency of operation or accepting lower profits. As a result, the actual reduction in imports may be less than anticipated.
Exporters cannot do this with an import quota since the quantity of imports allowed into the country is clearly specified the quota. It’s for this reason, and also because an import quota is less “visible‟, that domestic producers strongly prefer quotas to tariffs. However, since import quotas are more restrictive than equivalent import tariffs, society should generally resist these efforts.
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