1. Export Subsidies (under perfect competition) in a small countrya. For a small country, is the logic for why export subsidies provide negative gainsdifferent than the logic for why import tariffs provide negative gains? Explain2. Airbus and Boeing problem again. Suppose Boeing is more efficient at making airplanesthan Airbus. Starting from slide 33, Figure 10-9, let’s change the payoff matrix, so that if Boeingand Airbus both produce, Boeing gets +5, instead of -5. And, if Boeing produces, and Airbusdoes not produce, Boeing gets +125 instead of +100. Will there be a unique equilibrium in thiscase?3. Trade and the Environment Figure 11-4 in the slides shows a case of a negativeproduction externality and in which free trade leads to imports. Instead, analyze the case inwhich free trade leads to exports (i.e., the world price is greater than the no-trade price).a. Create your version of figure 11-4a, but illustrate the case in which the world price ishigher than the no-trade price.b. Comparing no-trade to free trade, label the relevant change in consumer surplus,producer surplus, and the social marginal cost with the letters “a”, “b”, and “c”, as in thetext.c. Is it possible for free trade to be harmful, overall? Explain. 3) International Agreements on theEnvironment (part 6)Does Trade Help or Harm the Environment?Externalities and Trade(a) Negative Production ExternalityFIGURE 11-4PricePApWab:Social marginalcosts, SMCSDPrice(b) Negative Consumption ExternalityabSDSocial marginalbenefits, SMBD₁ QuantityFeenstra/Taylor, International Trade, 5e © 2021 Worth PublishersS₁ QoD₁ QuantityS₁ QoPanel (a) illustrates a negative production externality, which means that the social marginal cost curve,SMC, lies above the private marginal cost (supply) curve S. With free trade, the price falls from Pª toPW and Home supply falls from Qo to S₁. As a result, the social cost of the externality is reduced byarea c, which measures a social gain that is additional to the private gains from trade, area b. 7) High-Technology Export Subsidies(part 3)"Strategic" Use of High-Tech Export SubsidiesPayoff Matrix In Figure 10-9, we show a payoff matrix for Boeing and Airbus,each of which has to decide whether to produce the new aircraft.FIGURE 10-9ProduceBoeingNot produceProduce Airbus Not produce-$5million-$5million$100million$100million$0$0Feenstra/Taylor, International Trade, 5e ⒸPayoff Matrix Between Two Firms The lower-leftnumber in each quadrant shows the profits ofBoeing, and the upper-right number shows theprofits of Airbus. Each firm must decide whether toproduce a new type of aircraft. A Nash equilibriumoccurs when each firm is making its best decision,given the action of the other. For this pattern ofpayoffs, there are two Nash equilibria, in the upper-right and lower-left quadrants, where one firmproduces and the other does not.$0$0Nash Equilibrium The idea of a Nash equilibrium is that each firm must make its own bestdecision, taking as given each possible action of the rival firm. When each firm is acting thatway, the outcome of the game is a Nash equilibrium. The action of each player is the bestpossible response to the action of the other player: 2 Nash equilibria - One in which Boeingproduces and Airbus does not; and one in which Airbus produces and Boeing does not.

An export subsidy is a financial incentive provided by a government to its domestic producers or…

Answered: Export Subsidies (under perfect…

Principles of Economics 2e

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Question

1. Export Subsidies (under perfect competition) in a small country
a. For a small country, is the logic for why export subsidies provide negative gains
different than the logic for why import tariffs provide negative gains? Explain
2. Airbus and Boeing problem again. Suppose Boeing is more efficient at making airplanes
than Airbus. Starting from slide 33, Figure 10-9, let’s change the payoff matrix, so that if Boeing
and Airbus both produce, Boeing gets +5, instead of -5. And, if Boeing produces, and Airbus
does not produce, Boeing gets +125 instead of +100. Will there be a unique equilibrium in this
case?
3. Trade and the Environment Figure 11-4 in the slides shows a case of a negative
production externality and in which free trade leads to imports. Instead, analyze the case in
which free trade leads to exports (i.e., the world price is greater than the no-trade price).
a. Create your version of figure 11-4a, but illustrate the case in which the world price is
higher than the no-trade price.
b. Comparing no-trade to free trade, label the relevant change in consumer surplus,
producer surplus, and the social marginal cost with the letters “a”, “b”, and “c”, as in the
text.
c. Is it possible for free trade to be harmful, overall? Explain.

3) International Agreements on the
Environment (part 6)
Does Trade Help or Harm the Environment?
Externalities and Trade
(a) Negative Production Externality
FIGURE 11-4
Price
PA
pW
a
b:
Social marginal
costs, SMC
S
D
Price
(b) Negative Consumption Externality
a
b
S
D
Social marginal
benefits, SMB
D₁ Quantity
Feenstra/Taylor, International Trade, 5e © 2021 Worth Publishers
S₁ Qo
D₁ Quantity
S₁ Qo
Panel (a) illustrates a negative production externality, which means that the social marginal cost curve,
SMC, lies above the private marginal cost (supply) curve S. With free trade, the price falls from Pª to
PW and Home supply falls from Qo to S₁. As a result, the social cost of the externality is reduced by
area c, which measures a social gain that is additional to the private gains from trade, area b.

7) High-Technology Export Subsidies
(part 3)
"Strategic" Use of High-Tech Export Subsidies
Payoff Matrix In Figure 10-9, we show a payoff matrix for Boeing and Airbus,
each of which has to decide whether to produce the new aircraft.
FIGURE 10-9
Produce
Boeing
Not produce
Produce Airbus Not produce
-$5
million
-$5
million
$100
million
$100
million
$0
$0
Feenstra/Taylor, International Trade, 5e Ⓒ
Payoff Matrix Between Two Firms The lower-left
number in each quadrant shows the profits of
Boeing, and the upper-right number shows the
profits of Airbus. Each firm must decide whether to
produce a new type of aircraft. A Nash equilibrium
occurs when each firm is making its best decision,
given the action of the other. For this pattern of
payoffs, there are two Nash equilibria, in the upper-
right and lower-left quadrants, where one firm
produces and the other does not.
$0
$0
Nash Equilibrium The idea of a Nash equilibrium is that each firm must make its own best
decision, taking as given each possible action of the rival firm. When each firm is acting that
way, the outcome of the game is a Nash equilibrium. The action of each player is the best
possible response to the action of the other player: 2 Nash equilibria - One in which Boeing
produces and Airbus does not; and one in which Airbus produces and Boeing does not.

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