More on the Equivalence of Tariffs and Quotas

Bhagwati, Jagdish N.

If one takes the pair-wise definition of equivalence, that a quota will give rise to an implicit tariff rate which, if alternatively set as a tariff, will generate the same level of imports as the quota, it is unambiguously clear that equivalence breaks down when there is monopoly import under both tariff and quota. An explicit tariff will not lead to an import level which, if set alternatively as a quota, will generate an implicit tariff equal to the explicit tariff; nor will a quota lead to an implicit tariff which, if set alternatively as an explicit tariff, will generate the same level of imports. In the case when foreign supply is monopolistic, the implicit tariff rate is zero under the quota but setting the actual tariff rate at zero and removing the quota restriction will not yield the same level of imports and domestic production; the truly equivalent tariff rate is higher. Similarly, in the case where there is domestic, import monopoly instead, the truly equivalent tariff is lower than the implicit tariff rate in the quota alternative.



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American Economic Review

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November 16, 2012