CA Foundation · Business Economics · International Trade
Compared with an import tariff that gives the same domestic price and same import quantity, an import quota allocated free of charge to importers differs mainly because:
The key difference is who receives the price gap on imports. Under a tariff the government collects it as revenue, but under a free quota allocation the government gets nothing and the gap becomes rent for licence holders. Prices and quantities are the same in both cases.
- AThe government collects no revenue; the price gap accrues as rent to licence holdersCorrect
- BThe government collects more revenue than under the tariff
- CDomestic consumers pay a lower price under the quota
- DDomestic production falls under the quota but rises under the tariff
Explanation
With the same domestic price and import quantity, domestic output and consumer prices are identical under both. The difference is who gets the price gap on imports: under a tariff the government collects it as revenue, while under a freely allotted quota importers keep it as rent. The option claiming higher government revenue reverses this.
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