Tariff versus Quota
Bhagwati (1965) first demonstrated that if perfect competition prevails in all markets, a tariff and import quota are equivalent in the sense that an explicit tariff reproduces an import level that, if set alternatively as a quota, produces an implicit tariff equal to the explicit tariff, and vice versa. This equivalence breaks down, for example, if the domestic production is monopolized. In this case, replacing an explicit tariff by an import quota set at the level equal to the imports under the explicit leads to a higher implicit tariff. Many other cases of the breakdown of the equivalence also arise. The ‘tariffs versus quota’ literature was stimulated by the seminal contribution by Bhagwati (1965). Bhagwati defined the two instruments as equivalent if an explicit tariff reproduces an import level that, if set alternatively as a quota, produces an implicit tariff equal to the explicit tariff and vice versa