A Note on the Distinction between Tariffs and Quotas

Abstract

Within the standard two-country, two-commodity competitive trade model, the proposition that each import quota has a tariff equivalent has received some attention in the trade protection literature. This note examines the converse result, and shows that inelasticity in the foreign offer curve can allow tariffs that no import quota can duplicate. In particular, import quotas preclude a Metzler Paradox, and will be unable to duplicate the optimum tariff should it require increased imports. Equivalent export quotas exist for these, however. More generally, the analysis demonstrates how inelasticity of demand can lead to a situation in which a small quantity restriction must be matched by a large price adjustment. While, under the usual assumptions, with each price there is associated a unique quantity, the converse does not always hold. We begin in Section I by setting up the model and briefly examining tariffs and the Metzler Paradox. Import and export quotas are then discussed in Sections II and III respectively. Section IV presents a diagrammatic representation, while Section V contains some final comments.