Tariffs versus Quotas under Market Price Uncertainty

This paper compares the welfare effects of a tariff and a quota in an imperfectly competitive market when demand is uncertain and policy must be chosen before the uncertainty is resolved. The model assumes a Cournot duopoly market with linear demand, additive uncertainty, homogeneous products, and constant marginal costs. It is shown that the optimal policy is autarky for high levels of uncertainty, a quota at the free-trade level for intermediate levels, and a tariff at low levels. JEL no. F13