A quota refers to the direct control of import demand, which will lower supply of imports, thus reducing quantity demand for imports. The restriction of the quantity of imported goods will create an artificial shortage that leads to the increase in price of the imported goods. Hence, there is a fall in import demand.
A quota is effective when extensive import of the good has detrimental impacts to the society, particularly demerit goods like cigarettes and alcohol. However, the imposition of quota may result in retaliation by other trading countries, in which these countries also implement trade protectionism, which will lower the world output.
The imposition of tariffs will raise the price of imported goods, such that there is a fall in quantity demanded of imports and the increase in demand for domestic goods.
Tariffs is effective when it can directly affect the output level and thus import demand. Tariffs generate government revenue which can be used to finance public projects.
This article is contributed by Mr. Simon Ng, founder and principal JC Economics Tutor of Economicsfocus, who has 20 years of teaching experience. Currently, Mr. Simon Ng provides specialized Economics Tuition and GP Tuition. To read more articles on Economics issues and skills development, please refer to the JC Economics Essays blog.