1.0 INTRODUCTION
There are two basic ways to provide protection to domestic import-competing industries; a tariff or a quota. The choice between one or the other is likely to depend on several different concerns.
One concern is the revenue effects. A tariff has an immediate advantage for governments in that it will automatically generate tariff revenue (assuming the tariff is not prohibitive). Quotas may or may not generate revenue depending on how the quota is administered. If a quota is administered by selling quota tickets (i.e., import rights)
then a quota will generate government revenue, however, if the quota is administered on a first-come, first- served basis, or if quota tickets are given away, then no revenue is collected.
Administrative costs of tariffs and quotas are also likely to differ. Tariff collection involves product identification, collection and processing of fees. Quota administration will also involve product identification and some method of keeping track, or counting, the product as it enters the country in multiple ports of entry. It may also involve some method of auctioning or disbursing quota tickets. It is not obvious which of these two procedures would be less costly, although, if I had to guess, I would lean towards tariff collection.
Perhaps the most important distinction between the two policies, however, is the protective effect the policy has on the import-competing industries. In one sense, quotas are more protective of the domestic industry because they limit the extent of import competition to a fixed maximum quantity. The quota provides an upper bound to the foreign competition the domestic industries will face. In contrast, tariffs simply raise the price, but do not limit the degree of com ...