Which statement best reflects the difference between tariffs and quotas?

• A. Tariffs impose a tax on imported goods, while quotas set a physical limit on the quantity of imports.
• B. Tariffs and quotas both set a fixed price for imported goods.
• C. Tariffs are only used for agricultural products, while quotas apply to all goods.
• D. Tariffs restrict imports by setting a maximum quantity, while quotas increase the price of imported goods.

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 increases their price and can reduce the quantity imported by making them more expensive.
2. Step 2: Recognize that a quota is a physical limit or cap on the quantity of a particular good that can be imported during a specific time period, directly restricting the amount rather than affecting the price.
3. Step 3: Compare the effects of tariffs and quotas. Tariffs affect the price of imports by adding a tax, while quotas limit the quantity regardless of price changes.
4. Step 4: Evaluate the incorrect statements: tariffs do not set fixed prices, are not limited to agricultural products, and do not set maximum quantities; quotas do not increase prices directly but limit quantities.
5. Step 5: Conclude that the best statement is the one that correctly distinguishes tariffs as taxes on imports and quotas as physical limits on import quantities.