It is possible for a quota on a medical product to result in same change in the domestic and foreign quantity supplied as a tariff would cause? Explain briefly.
The correct answer and explanation is:
Correct Answer: Yes, it is possible for a quota on a medical product to result in the same change in the domestic and foreign quantity supplied as a tariff would cause, but only under certain conditions.
Explanation (300 words):
Quotas and tariffs are both trade restrictions used by governments to control the quantity of imported goods, including medical products. However, they function differently. A tariff is a tax imposed on imports, which raises the price of the imported goods. A quota is a direct limit on the quantity of a product that can be imported, regardless of price.
Despite these differences, a quota can lead to the same changes in domestic and foreign quantity supplied as a tariff, if the quota is set at the same level of imports that would occur under the tariff. Here’s how:
Suppose a government imposes a tariff on a foreign medical product. This raises the import price, reducing the quantity imported and allowing domestic suppliers to sell more at a higher price. Foreign suppliers sell less because of reduced demand due to the higher price.
Now, suppose instead the government imposes a quota that limits imports to the exact same lower quantity that would have been imported under the tariff. In this case, the quantity of imports falls by the same amount, and domestic producers gain the same additional share of the market.
Thus, the result in terms of quantity—how much is imported (foreign supply) and how much is produced domestically (domestic supply)—can be identical.
However, the economic effects differ in terms of revenue:
- Under a tariff, the government collects revenue from the tax on imports.
- Under a quota, if import licenses are given for free, foreign suppliers or license holders may capture the profit (called quota rents), not the government.
In summary, while quotas and tariffs differ in mechanics and economic impacts, they can result in identical changes in quantities supplied domestically and internationally if carefully aligned.