4.3 - tariffs and quotas

trade protection definition

government intervention in international trade through setting trade barriers

forms of trade protection

• tariffs

• quotas

• production subsidies

• export subsidies

• administrative barriers

• embargo

tariffs definition

taxes on imported goods

quotas definition

legal limit to the quantity of good that can be imported

tariff graph

tariff surplus and loss graph

winning tariff stakeholders

• domestic producers

  • receive protection and higher price Pw+t

  • sell larger quantity Q2 rather than Q1

• increased domestic employment in the protected industry

• government gains tariff revenue

loosing tariff stakeholders

• domestic consumers

  • pay higher prices Pw+t

  • get smaller quantity Q3 rather than Q4

• domestic income distribution worsens

• increased inefficiency in production

• foreign producers

  • loss of revenue

  • receive Pw but for smaller quantity

• global misallocation of resources

quotas graph

quota surplus and loss graph

winning quota stakeholders

• domestic producers

  • receive higher price Pq

  • sell larger quantity Q2 rather than Q1

• domestic employment increases

neutral quota stakeholder

• government

  • budget is not affected

loosing quota stakeholders

• domestic consumers

  • pay higher price Pq

  • get smaller quantity Q3 rather than Q4

• domestic income distribution worsens

• increased inefficiency in production

• global misallocation of resources

quotas vs tariffs

quotas:

• restricting quantity of imports

  • allow S&D arrive at higher price of imports

tariffs

• increasing price of imports

  • allow S&D to arrive at lower quantity of imports

goal of tariffs and quotas

• lower quantity of imports

• higher domestic price