Suppose that the Malaysian gov
Suppose that the Malaysian government is considering whether toimpose an import tariff or quota to protect domestic automobileindustry. As an advisor, what are your advice to the government?Please analyse the similarities and differences between importtariff and import quota when there is a reduction in supply for theproduct. Use appropriate diagram/s to demonstrate your answers.
Answer:
My advice to the government is to impose import quota. An importquota sets a maximum amount of automobiles which can be imported bythe Malaysian government. This means no matter what the demand inthe market for imported vehicle is, the supply for the same isfixed by the government (i.e. quota).
On the other hand, what does an import tariff do? When an importtariff is imposed, the prices of these imported automobilesincrease thereby not attracting the domestic consumers to buy thesevehicles. This conceded well with the law of demand: as priceincreases the demand decreases. But we must understand here, thatthe demand decreases but doesn’t reach the null value. With thewealthiest 20% contributing close to 58% of Malaysia’s wealth,these Affluent consumers can still afford to buy these automobilesno matter how much tariff the government imposes. So, the veryreason for an import tariff is kind of defeated in this case. Ifthe consumer wishes to buy the car at any cost, he can do so bypaying extra, thereby causing a downturn for domestic manufacturersand a net welfare loss to the domestic consumers as well (i.e.reduction in consumer surplus is more than the increase in producersurplus)
Let’s see the supply curve after a tariff is imposed.
P1 is the price when imports were allowed without the tariff.Due to cheaper imports, the price is less than the equilibriumprice P and thus demand increases from Q to Q2. As a result, shareof domestic producers’ fall from Q to Q1 as shown in the figureabove. After a tariff imposition, the market share of domesticsuppliers increases from Q1 to Q4. Although this doesn’t bring backthe original market share Q of the domestic suppliers.
Let’s take a view at the supply curve after an import quota isimposed by the Malaysian government.
As you can see, the market share of the domestic consumersincrease from Q2 before import Quota to Q4 – (Q3 – Q2) after importquota. The quota for imports is Q3 – Q2 in this case. The marketshare considerably increases when compared to the tariff system,that to with little to no welfare loss for consumers, but of coursea loss in tax revenue for the government. But as far as the agendaof improving market share of domestic markets is concerned, importquotas will be a viable option.
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