Advantages Of Quotas – Economics Notes – For W.B.C.S. Examination.

Advantages of Quotas:

(I) Foreign Exchange Implication:

The main advantage of a quota is that it keeps the vol­ume of imports unchanged even when de­mand for imported articles increases. It is be­cause quotas make the completely elastic (horizontal) import supply curve completely inelastic (vertical).Continue Reading Advantages Of Quotas – Economics Notes – For W.B.C.S. Examination.

But a tariff permits imports to rise when demand increases, particularly if the demand for imports becomes inelastic. Thus, quotas lead to greater foreign exchange saving compared to tariff (which may even lead to an increase in foreign exchange spend­ing because imports may rise even after tariff).

(ii) Precise Outcome:

Another advantage of quotas is that its outcome is more certain and precise, while the outcome of tariff is uncer­tain and unclear. This is so because the vol­ume of imports remains unchanged if a quota is imposed. But this is not so in case of a tariff.

(iii) Flexibility:

Finally, Ingo Walter argues that “quotas tend to be more flexible, more easily imposed, and more easily removed in­struments of commercial policy than tariffs. Tariffs are often regarded as relatively perma­nent measures and rapidly built powerful vested interests which make them all the more difficult to remove.”

4. Disadvantages of Quotas:

(i) Corruption:

Quotas generate no revenue for the government. However, if the government auctions the right to import under a quota to the highest bidder only then quotas are simi­lar to tariff. But quotas lead to corruption. Usually, officials charged with the allocation of import licences are likely to be exposed to bribery. Under this situation, tariff is prefer­able to quotas.

(ii) Monopoly Profit:

Secondly, quotas cre­ates a monopoly profit for those with import licences. This means that consumer surplus is converted into monopoly profits. Thus, quo­tas are likely to lead to a greater loss of con­sumer welfare. If a tariff is imposed domestic price will be equal to import price plus tariff.

(iii) Monopoly Growth:

Thirdly, allied to this disadvantage of quotas another drawback is that quotas are much more restrictive in effect as it restricts competition. Thus, quotas may ultimately lead to concentration of monopoly power among the importers and exporters.

(iv) Distortion in Trade:

Finally, quotas have the tendency to distort international trade much more than tariffs since its effects are more vigorous and arbitrary.

Thus, we will have to make a choice be­tween tariff and quotas. A tariff is usually con­sidered a less objectionable method of trade restriction than an equivalent quotas. A tariff permits imports to increase when demand increases and, consequently, the government is able to raise more revenue. In contrast, quotas are less obvious and more likely to re­main in force for an indefinite period. For all these reasons, a tariff, while objectionable, is still preferable to quotas. WTO condemns quotas.

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