The home-country government can confiscate the revenue effect of an import quota if

 Options:

a. quota licenses are given to foreign exporting companies b. quota licenses are auctioned to the highest-bidding importing company c. if quota licenses are given to domestic consumers of the good d. both (a) and (c)

The Correct Answer Is:

b. quota licenses are auctioned to the highest-bidding importing company

Correct Answer Explanation: b. “quota licenses are auctioned to the highest-bidding importing company.”

When a country imposes an import quota, it essentially limits the quantity of a specific good that can be imported into the country. To enforce this quota, the government issues quota licenses, which grant the right to import a specified quantity of the restricted good.

These licenses are valuable because they allow the holder to engage in international trade and potentially profit from it.

Auctioning these quota licenses to the highest-bidding importing company is the correct choice for several reasons. Firstly, it ensures that the government maximizes its revenue from the sale of these licenses.

The highest bidder is willing to pay the most for the license, reflecting the value they place on being able to import the restricted good. This revenue can then be used by the government for various purposes, such as funding public services or reducing budget deficits.

Secondly, auctioning the licenses promotes economic efficiency. By allowing the licenses to be allocated to the companies that value them the most (as demonstrated by their willingness to pay the highest price), the government ensures that resources are allocated to their most productive uses.

This means that the companies that can generate the most economic benefit from importing the restricted good will be the ones granted the licenses.

Now, let’s discuss why the other options are not correct:

a. Quota licenses are given to foreign exporting companies:

This option is not correct because it would defeat the purpose of the import quota. The goal of an import quota is typically to protect domestic industries by limiting foreign competition.

If the government were to give quota licenses to foreign exporting companies, it would effectively undermine the purpose of the quota and allow foreign firms to continue exporting the restricted good.. This would be counterproductive to the purpose of implementing an import quota in the first place.

c. Quota licenses are given to domestic consumers of the good:

This option is also not correct. Giving quota licenses to domestic consumers would not serve the purpose of regulating imports.

Instead, it would likely lead to a situation where domestic consumers could freely import the restricted good, which would defeat the purpose of the quota and potentially harm domestic industries.

d. Both (a) and (c):

This option combines the incorrect options a and c. As discussed earlier, giving quota licenses to foreign exporting companies (option a) and domestic consumers of the good (option c) would not be consistent with the goals of an import quota.

It would either allow foreign companies to continue exporting the restricted good or give domestic consumers unrestricted access to it, both of which would undermine the purpose of the quota.

In conclusion, option b, auctioning quota licenses to the highest-bidding importing company, is the correct choice because it maximizes government revenue, promotes economic efficiency, and aligns with the intended purpose of an import quota.

The other options (a, c, and d) are not correct because they would lead to outcomes that are inconsistent with the objectives of implementing an import quota.

Related Posts

• Probably the least effective means of aligning management goals with shareholder interests is:
• On the statement of cash flows, the cash flows from operating activities section would include