Question

Suppose the U.S. government wants to curtail imports. Would it be likely to favor a tariff or a quota to accomplish its objective? Why?

Short answer

The preference of a method to curtail imports, a tariff or a quota, depends on the government’s objectives. If the goal is to strictly control import volume regardless of revenue, a quota would be more effective. However, if the government also wishes to generate revenue from the curtailment, it ought to choose tariffs.

Step-by-step solution

Understanding Tariffs

A tariff is a tax that a government places on imported goods. When a government imposes tariffs, the cost of those imported goods rises for the importers, which tends to reduce the quantity of goods imported. The major advantage of tariffs is that they generate revenue for the government.

Understanding Quotas

A quota, on the other hand, is a physical limit on the amount of a particular good that can be imported during a specific period. Quotas do not generate revenue, but they do effectively limit the quantity of goods coming in from foreign countries.

Comparing Tariffs and Quotas

Although both tariffs and quotas can be used to curtail imports, they have different impacts. If the government’s main objective is to completely control the import volume, using quotas might be more effective. However, if the government also wishes to benefit economically – to ensure revenue flow into the government’s treasury, then it would be more likely to choose tariffs, as tariffs generate revenue while quotas do not.