Tariffs vs. Quotas with Endogenous Quality

This paper analyzes some aspects of the effects of trade restrictions (such as tariffs, quotas and quality controls) and their desirability when the quantity of the imported good is endogenous, and the foreign producer is a monopolist. It uses a fairly general model based on the work of Spence and Sheshinski. A crucial determinant of the direction of these effects is shown to be the valuation of increments in quality by marginal consumers,relative to that of all consumers on average. A way of comparing infinitesimal equivalent policies is developed and used to compare import equivalent policies. For reasonable characterizations of demand - tariffs are shown to dominate quotas on the basis of their revenue effects alone, while quotas are shown to dominate tariffs on the basis of their quality effects alone. Also, quality controls are shown to dominate both tariffs and quotas on the basis of revenue effects alone for reasonable characterizations of demand. Some special cases are also analyzed, including the case where demand is modelled along the lines of Swan - and only services of the good produced matter to consumers.