Answer to Question #49383 in Macroeconomics for shana

Question

Explain briefly the effects of tariffs and quotas on domestic consumption, production
and prices.

Answer 1

A tariff is a tax imposed on imports and quota is a numerical limit on how much of a product can be imported into a country from abroad. The additional taxes lead to increase in prices and in turn to decline in domestic consumption. Domestic producers will face reduced competition in their home market and will be able to sell more output. The quotas imposed on imported goods lead to higher prices paid by consumers. Quotas tend to discourage consumption of imported goods as also domestic consumption of goods involving foreign raw materials. So, the consumption of these goods will decrease. Also, they have protective effect and stimulate home production.