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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

Consider a small country that exports steel. Suppose that a “pro-trade” government decides to subsidize the export of steel by paying a certain amount for each ton sold abroad. How does this export subsidy affect the domestic price of steel, the quantity of steel produced, the quantity of steel consumed, and the quantity of steel exported? How does it affect consumer surplus, producer surplus, government revenue, and total surplus? Is it a good policy from the standpoint of economic efficiency? (Hint: The analysis of an export subsidy is similar to the analysis of a tariff.)

To determine
The impact of export subsidy.

Explanation

International trade is the exchange of goods and services between different nations in the world. The exchange will take place and the two main processes are exports and imports. Exports refer to the sale of domestic goods to the foreigners and imports refer to the purchase of foreign goods by the domestic country. Export subsidies are the government financial assistance to the exporting firms of the economy. They will be in the form of tax exemptions, financial aid to the firm, and so on, which helps to reduce the cost of production of the firm, make it competent to the world, and induce the export of the economy. The situation when there is subsidy can be illustrated as follows:

The subsidy is by the amount of S. When there is a subsidy, it increases the price received by the domestic producers of that commodity. Thus, when the producers’ receiving price increases, they will produce more and export more. Here, before the subsidy, the price was PW and the quantity demanded was QD1. The supply by the producers was QS1. After the introduction of the subsidy by ‘S’, the price received by the producers increases to PW+S. The domestic buyers will be willing to purchase the same QD1 quantity at the price of PW and the producers will be willing to sell their products abroad, because it provides them PW+S price which is higher than the domestic price...

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