A country places an annual limit on the number of organic bananas that may be imported in an effort to limit the impact on the domestic banana producers. Which type of trade barrier is the government enacting?
Absolute quota is the type of trade barrier the government is enacting.
An absolute quota specifically limits the quantity of a particular good that may be imported, in this case, organic bananas, to protect domestic producers from foreign competition. This trade policy effectively restricts supply, ensuring that domestic banana producers can maintain their market share.
An ad valorem tariff is a tax based on the value of the imported goods, calculated as a percentage of the total price. While it raises the cost of imports, it does not limit the quantity of goods that can be imported. Therefore, it does not align with the government's objective of placing a specific cap on the number of organic bananas imported.
A tariff quota combines features of both quotas and tariffs, allowing a certain quantity of goods to be imported at a lower tariff rate, with any additional imports subjected to a higher tariff. While it does involve limits on quantities, it does not represent a strict cap as an absolute quota does, making it unsuitable for the situation described.
A compound tariff includes both a specific tariff and an ad valorem tariff on the same product. Like an ad valorem tariff, it does not impose a strict limit on the quantity of imports. Instead, it manipulates costs, which does not fulfill the requirement of limiting the importation of organic bananas.
An absolute quota sets a definitive limit on the quantity of imports allowed without any additional tariffs or charges once the limit is reached. This policy directly addresses the government's intent to restrict the importation of organic bananas to protect local producers, making it the correct choice.
The government is implementing an absolute quota to restrict the import of organic bananas. This trade barrier effectively limits the quantity of goods that can enter the market, thereby safeguarding domestic banana producers from excessive foreign competition. Other options, such as tariffs or tariff quotas, do not impose strict quantity limits and therefore do not align with the government's objective.
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