The diagram below shows the domestic demand and supply curves for cotton towels in Canada. The prevailing world price of cotton towels is PW. Assume that all cotton towels are identical.
FIGURE 20-3
Refer to Figure 20-3. Consider the Canadian producers of towels currently in a free-trade situation in this market. Now suppose the producers have successfully lobbied the government for protection for their industry. Suppose you are an advisor to the government and are asked to recommend whether they should impose a tariff of $t per unit or an import quota of (Q3 - Q2). What should you recommend?
◦ The tariff - the tariff revenues are collected by the government, rather than going to the foreign producers.
◦ Either - it makes no difference to the overall economy either way.
◦ The import quota - the deadweight loss to the economy as a whole is smaller than with the tariff.
◦ The tariff- the domestic producers will receive all of the revenue previously accruing to foreign suppliers.
◦ The import quota - revenues accruing to domestic producers will be higher than with the tariff, which is better for the overall economy.
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