What is the main economic difference between a tariff and a quota?

• A. A tariff restricts the quantity of imports directly, while a quota increases the price of imports.
• B. A quota is a tax on imported goods, while a tariff is a limit on the quantity of imports.
• C. A tariff generates government revenue, while a quota does not.
• D. A quota always leads to lower prices for consumers compared to a tariff.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the definitions of tariff and quota. A tariff is a tax imposed on imported goods, which raises the price of those goods. A quota is a direct limit on the quantity of a good that can be imported.
2. Step 2: Analyze the effects of a tariff. Since a tariff is a tax, it increases the cost of imported goods, which typically raises their market price and generates revenue for the government.
3. Step 3: Analyze the effects of a quota. A quota restricts the quantity of imports allowed, which can raise the price of the imported good due to limited supply, but it does not generate revenue for the government directly.
4. Step 4: Compare the economic outcomes. The key difference is that tariffs generate government revenue through the tax collected on imports, whereas quotas restrict quantity but do not provide direct revenue to the government.
5. Step 5: Use this understanding to evaluate the given options and identify that the main economic difference is that a tariff generates government revenue, while a quota does not.