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IAI Actuarial Core Principles · Business Economics · Importance of international trade

Compared with a tariff that restricts imports to the same level, an import quota allocated free of charge to foreign exporters most directly results in which difference?

With a free quota, the price gap between domestic and world prices becomes quota rent captured by licence holders, often foreign exporters or importers, whereas a tariff of equal effect yields revenue to the government. Prices to consumers and producers are similar under both.

  1. ADomestic consumers pay a lower price under the quota
  2. BDomestic producers receive a lower price under the quota
  3. CThe quota raises government revenue by more than the tariff
  4. DThe scarcity rent goes to licence holders rather than the governmentCorrect
  5. The quota leaves domestic and world prices equal

Explanation

Both policies raise the domestic price by restricting supply. A tariff gives the price gap to the government as revenue; a free quota gives it to the holders of import licences as quota rent. The government gets no revenue from a free quota, so the other options are wrong.

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