Question

Show graphically that for any tariff, there is an equivalent quota that would give the same result. What would be the difference between the two types of trade barriers? Hint: It is not something you can see from the graph.

a) Both tariff and quota result in higher domestic prices. Tariffs generate government revenue, while quotas create scarcity.
b) Tariffs and quotas have similar effects on domestic prices. Tariffs increase government revenue, while quotas lead to surplus profits for domestic producers.
c) Tariffs and quotas cause distortions in the market. Tariffs generate government revenue, while quotas create deadweight loss.
d) Both tariff and quota increase consumer prices. Tariffs benefit foreign producers, while quotas harm domestic consumers.

Answer 1

Graphically, tariffs and quotas can produce the same effect on market equilibrium, although they differ in that tariffs generate government revenue, while quotas create surplus profits for license holders.

Step-by-step explanation:

To graphically show that for any tariff, there is an equivalent quota that would give the same result, one can illustrate this using supply and demand curves. When a tariff is imposed, it shifts the supply curve upward by the amount of the tariff. Consequently, this raises the price of imported goods to consumers and lowers the quantity demanded, bringing it to a new equilibrium. Similarly, a quota limits the quantity of goods imported, raising prices and lowering quantity demanded to equalize at the same new equilibrium point as the tariff would.

The main difference between a tariff and a quota cannot be seen on the graph: tariffs generate government revenue, while quotas lead to surplus profits for the domestic or foreign license holders that are allowed to import the restricted quantity. Neither of these outcomes is represented on the standard supply and demand diagram, as they relate to income distribution rather than market equilibrium.