Principles of Microeconomics / Unit 16 MIC 1514 worked example, 60 to 90 seconds
Tariff Against Quota
The idea
An import quota below the free-trade flow raises the importer's price until its excess demand equals the quota, and lowers the exporter's price until its excess supply does; the gap between the two prices is the quota's wedge. Compare with a tariff of that size: same prices, same quantities, same triangles. The difference is the rectangle: a tariff's goes to the importer's government as revenue; a quota's goes to whoever holds the licences, often foreign producers, as quota rent.
In practice
Worked example: with free trade Home imports forty tons at six hundred. A quota of twenty: Home's price rises to seven hundred, where it wants ninety and makes seventy, twenty short; Foreign's price falls to five hundred, where it makes sixty and wants forty, twenty over. The wedge is two hundred dollars on twenty tons, four thousand. Under a two-hundred-dollar tariff the four thousand is Home's revenue; under the quota it is rent to the licence holders, and if foreign exporters hold them the money leaves the country.
Where people slip
A quota raises foreign sellers' price without raising their cost, so it can raise their profit, and no entry can compete it away; a tariff raises their cost. That is why exporters sometimes accept a quota they would fight as a tariff.
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