Consider a small country applying a tariff t as in Figure 8-5. Instead of a tariff on all units imported, however, we will suppose that the tariff applies only to imports in excess of some quota amount M′ (which is less than the total imports). This is called a

“tariff-rate quota” (TRQ) and is commonly used on agricultural goods, including sugar imports into the United States.

a. Redraw Figure 8-5, introducing the quota amount M′. Remember that the tariff applies only to imports in excess of this amount. With this in mind, what is the rectangle of tariff revenue collected? What is the rectangle of quota rents? Explain briefly what quota rents mean in this scenario.

b. How does the use of a TRQ rather than a tariff at the same rate affect Home welfare? How does the TRQ, as compared with a tariff at the same rate, affect Foreign welfare? Does it depend on who gets the quota rents?

c. Based on your answer to (b), why do you think TRQs are used quite often?

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