Question

Which of these three explanations of why free markets are efficient is (are) violated by tariffs and quotas?

I. The supply of goods is bought by the buyers with the highest willingness to pay.
II. The supply of goods is sold by the sellers with the lowest costs.
III. Between buyers and sellers, there are no unexploited gains from trade or any wasteful trades.

Answer 1

Tariffs and quotas violate explanations I and II of why free markets are efficient.

Step-by-step explanation:

Tariffs and quotas disrupt the efficient allocation of goods in free markets by impeding the principle of buyers purchasing from those with the highest willingness to pay (Explanation I) and sellers selling to those with the lowest costs (Explanation II). Tariffs, for instance, raise prices for imported goods, limiting access for buyers with varying levels of willingness to pay. Meanwhile, quotas artificially restrict supply, preventing sellers with lower costs from participating fully in the market. Both mechanisms distort the natural flow of trade, creating inefficiencies by diverting transactions away from optimal points of exchange. Consequently, they generate unmet demand from willing buyers and underutilized capacity among efficient, low-cost sellers, contradicting the fundamental premises of an efficient market (Explanation III).

The correct answer is that tariffs and quotas violate explanations I and II of why free markets are efficient.