Question

Are tariffs and quotas equivalent in their economic effects? Why do governments generally prefer to impose tariffs over quotas?

Answer 1

Tariff and quotas impact differently to the economy and are different in their economic impact. The first difference is that tariff helps government earn tariff revenue on the basis of each unit of imports, but the quota is a barrier where fixed quantity is allowed to be imported, but government does not collect any revenue on imported goods. In contrast to it, tariff still has the scope of an import bigger quantity of goods if it can pay the tariff and compete in the market. Though, such possibility is vanished when quota is applied as it has fixed quantity of goods to be imported. Hence, tariff and quota make different economic effects.

Government prefers to impose tariff, because it helps government earn revenue. besides, it creates a decrease in deadweight loss if imported goods have relatively inelastic demand. But, such flexibility is not there with the quota system. So, tariff based barrier is preferred by the government.