| Summary: | Economists Partha Dasgupta and Joseph Stiglitz consider whether a pure tariff or a pure quota is better for raising revenue when there is uncertainty about the foreign price of a good and about its domestic demand and supply functions. They conclude that "a pure tariff is unambiguously superior to a pure quota in generating a given expected level of government revenue." In arriving at this conclusion, the authors use some approximations which they recognize to be valid only when the revenue to be raised, and hence the tariff required, is small. In this note it is shown that, even when this condition is satisfied, tariffs can be inferior to quotas, unless the tariff rate t required under a pure tariff is small compared to the degree of uncertainty in the foreign price &ptilde;. If this assumption is reversed, and the degree of uncertainty in the shift parameters ã and &ytilde; in the domestic demand and supply functions is small, then a pure quota can be superior to a pure tariff.
|
|---|