Do you see why this maybe so?
Do think about this now and try to jot down some ideas as to why a quota on
American food exports in Europe would be more likely to help avert a trade
war between Europe and America than a tariff.
When you're ready, let's move on to what may be the surprising but
intuitive answer.
[MUSIC]
So why is a quota likely to be more politically palatable than a tariff in our
example?
To see why, take a look at this figure which shows that a 100 unit quota
on American food exports would get you to exactly the same level of protection for
European farmers is the equivalent tariff of $2 per unit.
But here's the big political difference, under a tariff
the shaded area HIKJ goes to the European government in the form of tariff revenues.
However under a quota, it is the foreign exporters,
in this case American food producers, that will be able to capture these revenues.
And in many cases, these additional revenues
largely offset American losses from selling fewer exports.