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Costly distribution and the non-equivalence of tariffs and quotas

Author

Listed:
  • James Lake

    (Southern Methodist University)

  • Maia K. Linask

    (University of Richmond)

Abstract

When governments impose a quota or tariff on imports, it is well known that the resulting rents and revenues trigger costly rent-seeking and revenue-seeking activities, which are welfare- reducing and may be economically more significant than the efficiency losses resulting from the quota/tariff-induced resource reallocation. Repeated interaction among firms can eliminate wasteful rent- and revenue-seeking expenditures through cooperation. We show that while aggregate outcomes are equivalent under tariffs and quotas if cooperation arises, the conditions under which cooperation arises differ by policy. This difference arises because a firm must incur additional cost to physically import and distribute the goods associated with additional quota licenses, whereas there is no such cost when it comes to consuming additional tariff revenue. Thus, quotas and tariffs are non-equivalent. We provide a simple sufficient condition under which cooperative elimination of rent-seeking under quotas is easier than cooperative elimination of revenue-seeking under tariffs and therefore a quota is the optimal policy whenever the optimal policy admits cooperation.

Suggested Citation

  • James Lake & Maia K. Linask, 2015. "Costly distribution and the non-equivalence of tariffs and quotas," Departmental Working Papers 1509, Southern Methodist University, Department of Economics.
    • Handle: RePEc:smu:ecowpa:1509
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    References listed on IDEAS

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    2. Randall G. Holcombe, 2017. "Political incentives for rent creation," Constitutional Political Economy, Springer, vol. 28(1), pages 62-78, March.
    3. Ian A. MacKenzie, 2017. "Rent creation and rent seeking in environmental policy," Public Choice, Springer, vol. 171(1), pages 145-166, April.

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    More about this item

    Keywords

    Rent-seeking; revenue-seeking; equivalence; near-equivalence; quotas;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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