Which of the following statements about tariffs and quotas is true?

• A. Both tariffs and quotas restrict imports, but tariffs generate government revenue while quotas do not.
• B. Tariffs and quotas are identical in their effects on consumer surplus.
• C. Tariffs and quotas have no impact on domestic prices.
• D. Quotas always increase government revenue, while tariffs do not affect revenue.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the definitions of tariffs and quotas. A tariff is a tax imposed on imported goods, which raises the price of those goods and generates revenue for the government. A quota is a limit on the quantity of a good that can be imported, restricting supply but not directly generating government revenue.
2. Step 2: Analyze how tariffs and quotas affect imports. Both tariffs and quotas reduce the quantity of imports by making imported goods more expensive or limiting their availability, thus restricting imports.
3. Step 3: Examine the impact on government revenue. Since tariffs are taxes on imports, they generate government revenue proportional to the quantity imported and the tariff rate. Quotas, however, do not inherently generate government revenue unless the government auctions import licenses, which is not always the case.
4. Step 4: Consider the effects on consumer surplus. Both tariffs and quotas increase domestic prices, which reduces consumer surplus. However, the distribution of welfare losses differs because tariffs generate government revenue, while quotas may create quota rents that benefit importers or foreign producers.
5. Step 5: Evaluate the statements given in the problem. Identify which statement correctly reflects the economic effects of tariffs and quotas based on the above analysis.