The U.S. government would like to help the American auto
industry compete against foreign automakers that sell trucks
in the United States. It can do this either by imposing a quota
on the number of foreign trucks imported or by imposing an
excise tax on each foreign truck sold in the United States. The
hypothetical demand and supply schedules for imported
trucks are given in the accompanying table.
a. In the absence of government interference, what is the
price of an imported truck? How many are sold in the
United States? Illustrate with a diagram.
b. Suppose the government adopts a quota, allowing no
more than 200,000 foreign trucks to be imported. What is
the effect on the market for these trucks? Illustrate using
your diagram from part a and explain.
c. Now suppose that, instead of a quota, the government
imposes an excise tax of $3,000 per truck. Illustrate the
effect of this excise tax in your diagram from part a. How
many trucks will now be purchased and at what price?
What will the foreign automaker receive per truck?
d. Calculate the government revenue raised by the excise tax
in part c. Then illustrate it on your diagram from that
part. Do you think the government, from a revenue standpoint, prefers an excise tax or a quota?
e. Explain how the government policy, whether it be a quota
or an excise tax, benefits American automakers. Whom
does it hurt? What is the missed opportunity here and
how does it reflect inefficiency?