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 S_D while the demand curve is given by D_d.

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 (P_T). If trade is free, the international price that would pre­vail is assumed to be P_W. At the international price P_W, 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 P_t 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 P_T. 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 P_t 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.

Please subscribe here to get all future updates on this post/page/category/website

Want to keep yourself updated about WBCS and other Govt. exams? Submit the form here-

For all WBCS Exam etc. course details CLICK HERE

If you want to be in contact with us and get future posts and news, subscribe here...

* indicates required

Email Address *

First Name

Your information will *never* be shared or sold to a 3rd party.