Justification and effects on economic of Import Quota:-
Explain the import quota and what effect on the economy of import quota and also discuss its justification?
The govt. may directly restrict the volume of permissible imports to a certain maximum level. The absolute limit is known as the import quota.
For example, the number of cars imported may be limited to 2 million. If pre-market demand for imports falls below the quota. The quota becomes ineffective or nonbinding.
To administer the quota the govt. distributes import licenses to importers, allowing each one to import the commodity up to a prescribed limit.
The importer is not free to import any quantity above that limit regardless of market demand.
Economic Effects of Quota
Justification and effects on economic of Import Quota:
Because it restricts the volume of imports, the import quota raises the domestic price of the imported commodity in much the same way as does the tariff.
Indeed the excess of domestic over foreign price can be regarded as the implicit tariff equivalence of the nontariff barrier.
And that tariff equivalent can be calculated in percentage form by subtracting the foreign from the domestic price and dividing the result by the foreign price.
For example, if the international price of a widget is $100, and an import quota raises its domestic price by $20 (to $120), then the tariff equivalent of that quota is 20/100, or 20 percent.
Similar calculations can be made for any combination of nontariff barriers. As a result of the quota-induced price hike, consumption of the imported product declines and consumers switch to lose desirable domestic substitutes.
Local production of substitute products then expands under the protection accorded to their producers, with resources dream from other industries.
In contrast to the tariff, however, there is no revenue to the govt. in this case, it accurses to the holders of import licenses, who are able to charge a higher price for each that of the restricted supply. This revenue is called quota rents.
Only by auctioning the import licenses can the govt. recoup the rents. Now we explain the justification of import quotas, which is as under:
Justification for Quotas:
In developing countries, quotas are used in all sectors for a mixture of reasons. Often, these countries attempt to develop new industries to produce substitutes for imported goods and believe that this can be accomplished only under a protective shield of import quotas.
Tariffs, even high ones, do not provide the local manufacturer with the same degree of certainty. No one knows that the level of supply and demand response to price change nor.
Therefore, how much of a foreign commodity would be excluded from the domestic market by a given tariff level.
Justification: effects on economic of Import Quota
Consumers may prefer imported, internationally known brands even at higher prices. And foreign producers may choose to absorb part of the duty in order to avoid losing sales.
None of these uncertainties exists in the case of quotas administrative action.