CFA Practice Question

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CFA Practice Question

Suppose the government is considering imposing either a tariff or a quota on an imported good. If they use a quota, they will distribute the import licenses randomly to importers. With a quota, the ______ will make money; under a tariff, the ______ will make money.

A. government; importers
B. importers; government
C. Neither the government nor the importers will make money.
Correct Answer: B

Both quotas and tariffs work by artificially raising prices, thus encouraging domestic production. Under a tariff, the difference between the old price and the new one is collected by the government as revenue. With a quota, however, the importers keep the difference.

User Contributed Comments 3

User Comment
Smiley225 government charges for import licenses could make A an option.
hocj not really as govt would still make $$ under tariffs, not importers.
mikus can someone explain how importers make money when quota is imposed on a product they are importing? firstly, the product now may be more expensive as exporting counterpart may raise the prices to cover the loss on volume; secondly, imposing quota reduces imports, which leads to increased domestic production; domestically produced products are typically more expensive so I just do not see how importer can make money with quotas.
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