Types of trade protection practice questions.

An import quota set below the free-trade quantity of imports will most likely

• lower the domestic price and increase domestic consumption
• raise the domestic price and reduce the quantity of imports
• raise government tax revenue equal to the quota rent
• leave the domestic price unchanged while increasing consumption

Answer: raise the domestic price and reduce the quantity of imports

By restricting supply from abroad, a binding quota creates a shortage at the world price, pushing the domestic price up and cutting imports; unlike a tariff, it normally creates no government revenue.

Compared with a tariff that achieves the same increase in domestic output, a subsidy paid to domestic producers of the good will

• raise the price paid by domestic consumers above the world price
• generate revenue for the government
• leave the consumer price at the world price but cost taxpayers
• reduce domestic production below its free-trade level

Answer: leave the consumer price at the world price but cost taxpayers

A production subsidy shifts domestic supply without raising the price consumers pay, so there is no consumption distortion; the burden falls on taxpayers instead of consumers.

Which of the following is best classified as an administrative barrier to trade?

• A 10% tax applied to imported textiles
• A legal maximum quantity of rice imports per year
• A payment per tonne made to domestic wheat farmers
• Complex customs paperwork that delays imports

Answer: Complex customs paperwork that delays imports

Administrative barriers restrict imports through regulations, standards and bureaucratic procedures rather than through taxes (tariffs), quantity limits (quotas) or payments to producers (subsidies).

When an import quota is enforced through licences handed out free of charge to foreign exporting firms, the quota rent is captured by

• the foreign firms holding the licences
• the government of the importing country
• domestic consumers, through lower prices
• domestic retailers, through higher sales volumes

Answer: the foreign firms holding the licences

Licence holders buy at the world price and sell at the higher domestic price, pocketing the difference as quota rent; the importing country's government receives nothing unless it auctions the licences.

A country imposes a tariff on imported microchips, which domestic electronics firms use as an input. A likely consequence is that

• the price of finished electronics falls in the domestic market
• domestic firms' input costs rise, hurting export competitiveness
• domestic microchip producers cut their prices to match the world price
• government revenue falls because microchip imports become cheaper

Answer: domestic firms' input costs rise, hurting export competitiveness

Tariffs on imported inputs raise costs for downstream domestic industries, which can make their final products less competitive at home and abroad — a key unintended effect of protection.

A government replaces a tariff with an import quota that allows exactly the same volume of imports. What is the effect of the quota compared with the tariff?

• no tariff revenue; quota rents go to the licence holders
• results in a lower domestic price of the good than the tariff
• increases the surplus of domestic consumers
• raises more revenue for the government

Answer: no tariff revenue; quota rents go to the licence holders

With equivalent import volumes the price and welfare effects are similar, but the government's tariff revenue is replaced by quota rents that typically go to whoever holds the import licences.