In which of the following cases does an import quota result in a higher welfare loss than a tariff?

Question

Quizplus · Accepted Answer

When import licenses are allocated through resource-using application procedures, it creates additional inefficiencies and costs for both domestic and foreign firms. Domestic firms, who have to apply for licenses, incur extra costs and may be less productive as they have to spend time and resources to navigate the application process. Foreign firms may also face additional costs and uncertainty in getting the licenses to export to the importing country. This results in a bigger welfare loss than a tariff, where there are no such administrative costs. A highly competitive domestic industry (option D) may lead to a smaller welfare loss as it can produce similar products at lower costs, but it is not necessarily better than a tariff in all cases. Option A and B do not necessarily affect the welfare loss from an import quota as they do not address the underlying inefficiencies created by the quota system.

In Which of the Following Cases Does an Import Quota