Tariffs and Quotas

Suppose that the United States imports cocaine from Columbia. Suppose that the cost of producing and shipping cocaine is \$5 a kilo, and that the demand for cocaine is

Q = 17,000 - 15P

where Q is the quantity of kilos consumed and P is the price of cocaine.

In the absence of any restrictions on trade, the equilibrium price will be \$5, and the equilibrium quantity that the U.S. will import and consume will be 16,925 kilos.

Next, suppose that the United States decides to restrict imports of cocaine by the means of a drug war. The result is to reduce the quantity of cocaine to 2000 kilos. We can use the demand equation to solve for the equilibrium price when there are only 2000 kilos.

2000 = 17,000 - 15P; P = \$1000. The price of a kilo rises to \$1000.

Instead of the drug war, the United States could impose an import tariff on cocaine of \$995 a kilo. This would raise the price to \$1000, and lead to a quantity consumed of 2000 kilos.

When countries want to restrict imports, sometimes they impose quotas and sometimes they impose tariffs. Either way, the cost to consumers rises and consumers are hurt. However, with a tariff, some of what consumers lose is collected by the government in the form of taxes. With a quota, some of what the consumers lose is collected by the suppliers who are fortunate enough to have their product shipped as part of the quota. In the case of the cocaine drug war, the steep price of cocaine that consumers face is a source of profits to successful criminal enterprises.

You can tell from this discussion that economists tend to view drug policy in terms of tariffs and quotas. From this perspective, legalization with high taxes, as we do with cigarettes and alcohol, is equivalent to a tariff. The drug war is equivalent to a quota. Economists tend to prefer the tariff approach, which means that they tend to support legalization of drugs.

For goods and services that are less controversial than cocaine, economists tend to oppose both tariffs and quotas. That is because tariffs and quotas interfere with the potential gains from trade that come from comparative advantage.

An individual industry can benefit from a tariff or quota. If you are a farmer in France, then you would like a tariff on foreign farm products, because you want the price of farm products to be high in France. France as a whole would be better off with lower food prices and fewer farmers, but it is hard to get the French farmers to see it that way--particularly when they vote. American steel producers and textile producers are similarly in favor of tariffs and quotas.