Question

Suppose the government imposes an import quota rather than a tariff on butter. What quota limit would generate the same quantity of imports as a tariff of $0.50 per pound?

Short answer

A quota limit that equals the domestic quantity of butter supplied and domestic quantity demanded will provide the same quantity of imports as a tariff of $0.50 per pound.

Step-by-step solution

Meaning of import quota

When a government brings a policy to restrict the quantity of an imported good, it is referred to as import quota. It is a trade-restrictive policy that the government uses to safeguard the interests of domestic producers.

Suggesting the quota limit that will bring the same quantity of imports as a tariff of $0.50 per pound

If the government imposes a tariff of $0.50 per pound, the price level of butter will reach the autarky price of $1.00 per pound. At this price level, the quantity supplied by domestic producers will be equal to the quantity demanded by domestic consumers. Thus, the import will be zero.

An import quota that will reduce the gap between the quantity of butter supplied by the domestic producers and the quantity demanded by the domestic consumers will result in zero imports.