Question

4. A graphical comparison of tariffs and quotas Alagir and Ertil are small countries that protect their economic growth from rapidly advancing globalization by limiting the import of rugs to 20 million. To this end, each country imposes a different type of trade barrier when the world price (Pw) is $3,000. In Alagir, the government decides to impose a tariff of $2,000 per rug; in Ertil, the government implements a quota of 20 million rugs. Assume that Alagir and Ertil have identical domestic demand (Do) and supply (S) curves for rugs as shown on the following graph. Under these conditions, the price of rugs is $5,000 per rug in each country.

Answer 1

Quantity Demanded at New Price (Millions of rugs) Imports (Millions of rugs) Country Alagir (tariff = $2,000) Ertil (quota - 20 million rugs) Price (Dollars) 5000 6000 80 40 70 20

Explanation:

Alagir has kept the tariff at $2,000. So, with increase in demand, prices in Alagir has remained at $5,000 per rug.

With respect to the new demand curve, D₁, domestic quantity demanded is 80 million rugs while domestic quantity supplied is still 40 million rugs.

So,

Imports = Domestic quantity demanded - Domestic quantity supplied

Imports = 80 million - 40 million = 40 million

Ertil has kept the quota at 20 million rugs.

So, with an increase in demand and simultaneous imposition of quota, price in Ertil has increased to $6,000 per rug.

At this price, domestic quantity demanded is 70 million rugs while domestic quantity supplied is 50 million rugs

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False

Explanation:

Increase in demand has resulted in higher price and the increase in the quantity supplied by the domestic producers.

So, This increase in demand helps domestic producers but hurts the domestic consumers in Ertil.

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Tariff is a less restrictive trade barriers than an equivalent quota.

Reasons -

1. An exporter can try to cut costs or slash profit margin.

2. Importers who are able to pay the tariff duty will get the product.