On the Welfare Effect of an Equivalent Tariff and Quota

Abstract

Over many years, the comparison of tariffs and quotas has retained an important place in the study of trade restrictions. This note shows that there are substantial differences in the welfare effects of an equivalent tariff and quota designed to achieve identical import restrictions. When there is an increase in demand, the deadweight loss from an import quota will be greater than that of a tariff. Geometric presentations are executed by way of comparative static analyses for a small open economy. Moreover, measurements of welfare effects in terms of the demand elasticity and the supply elasticity are explicitly derived algebraically. A case involving monopoly is also explored to highlight the relative merit of a tariff as a means of import restriction.