Cabinet Task Force on Oil Import Controls, Oil import quotas, Oil import tariffs
Macroeconomics | Public Economics
During the recent deliberation of the Cabinet Task Force on Oil Import Controls, considerable attention was devoted to the question whether, regardless of the level of imports which should be allowed, the control should take the form of a quota or a tariff. Occasionally reference was made to a well-known equivalence theorem which holds that when there is perfect competition in the product market a tariff will generate a volume of imports which, if alternatively set as a quota, produces an identical discrepancy between foreign and domestic prices. Therefore, other than the transfer of revenues from quota holders to the treasury, there should be no difference between the two types of control.
Nevertheless, some support for a quota persisted on the grounds that “A tariff can’t do anything to help the consumer. It will have the same effect in limiting imports as a quota, but all the money goes into the treasury. With quotas, on the other hand, there’s some chance of benefits trickling down to consumers in the form of lower prices.” Since the market conditions and import regulations for oil differ somewhat from the textbook examples, it is worthwhile to consider whether, in this particular case, there is some reason for consumers to prefer quotas to an “equivalent” tariff. It will turn out that due to the peculiar nature of oil quotas which are set as a fraction of refinery output, such a proposition can be shown to be true under a very restrictive set of assumptions.
Hay, George A., "Import Controls on Foreign Oil: Tariff or Quota?" (1971). Cornell Law Faculty Publications. Paper 1170.
Published in: American Economic Review, vol. 61, no. 4 (September 1971).