Tariffs versus Quotas under Producer Rent Equivalence
2019
Kaempfer, William | Marks, Stephen | Willett, Thomas
The economic effects of tariffs and quotas used to protect a domestic monopolist from foreign imports have typically been contrasted by examining policies that yield an equivalent domestic price or level of imports. This paper emphasizes an alternative criterion for equivalence—domestic producer rent equivalence—which is especially useful for political economy analysis. We generalize earlier results for the small-country case to large countries, and show that a quota will allow more imports, but at a higher price, than the tariff that generates an identical level of domestic producer rent. The welfare ranking of the two instruments is in general indeterminate. However, the domestic deadweight costs of the tariff are necessarily lower than those of the quota in the neighborhood of the free-trade equilibrium. On the other hand, the costs imposed on foreign producers are always lower under the quota than under the tariff; Finally, as the level of protection increases--due to a downward shift in foreign costs, with domestic producer rent held constant-- the quota is associated with a smaller increase in domestic opportunity cost than is the tariff. Thus, persistent increases in the international value of the domestic currency, or erosion of comparative advantage in the domestic industry, should eventually make the quota the more efficient policy.
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