Q. 38 Show graphically that for any ta... [FREE SOLUTION]

Chapter 21: Q. 38 (page 523)

Show graphically that for any tariff, there is an equivalent quota that would give the same result. What would be the difference, then, between the two types of trade barriers?

Short Answer

Expert verified

The result that tariff imposition gives, same result can be observed through quotas as well. The difference being, quota focuses on limiting the quantity of imports, and tariffs focus on imposing taxes to make them expensive.

Step by step solution

Step1. Introduction

Trade refers to the exchange of goods and services between the people of different countries.

Trade barriers are restrictions to limit the trade and hence protect domestic industries from foreign competition.

The two most common trade barriers are tariffs and quotas.

Step2. Explanation

Graphically-

When free trade exists,

At price P,

producers produced Q1,

consumers consumed Q2,

the difference between the consumption and domestic production is the consumption through imports.

Hence, when free trade exists, country imports Q2-Q1 from abroad at price P.

If, an import quota is fixed such that only Q4-Q3 quantity can be imported, the prices shall rise to Pt due to reduced supply and demand being the same.

As prices rise, domestic supply increases to Q3, and demand reduces to Q4.

Hence, only Q4-Q3 is imported (in line with the quota restriction policy).

Same results can be obtained by imposing a tariff of Pt-P so that the prices become Pt. .