CFA Level I · CFA Level I Exam · International Trade
A country imposes an import quota on steel, arguing that domestic production of steel is essential for defense in wartime. Compared with a tariff that gives the same reduction in imports, the quota most likely:
The quota most likely generates quota rents that accrue to holders of import licenses. Unlike a tariff, which yields government revenue, a quota lets license holders capture the price difference between domestic and world prices, unless the government auctions the licenses. Deadweight losses remain.
- Agives the government tariff revenue that can be redistributed to taxpayers
- Bgenerates quota rents that accrue to holders of import licensesCorrect
- Craises domestic welfare by removing the deadweight loss
Explanation
With a quota, the price gap between the domestic and world price is captured by whoever holds the import licenses (quota rents), often foreign exporters or license holders. The government collects revenue only if licenses are auctioned. A quota still creates deadweight loss.
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