exportsubsidy

exportsubsidy - University of Hong Kong Strategic Trade:...

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University of Hong Kong Strategic Trade: the Case of Export Subsidy ECON0301 Last revision: April 25, 2005 This revision: Jan 10, 2006 Under standard assumptions (constant returns to scale and perfect competition in all markets), export subsidy is never optimal for the imposing country from it national welfare point of view. Here we argue that if the assumption of perfect competition is invoked, there is a case for export subsidy. A country can gain by subsidizing its export industry. Consider a very simple example of duopoly model. There are two f rms: Boeing ( f rm 1) and Airbus ( f rm2)wh icharelocatedintheUSandthe EU, respectively. The two f rms only sell to a third country called China. China considers the aircraft produced by the two f rmsasident ica l ,and has a demand of p = A q 1 + q 2 . Finally, assume that the two f rms have zero marginal costs and zero f xed costs. We consider the following two stage game. In stage 1, the US announces an export subsidy (s) to Boeing,
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This note was uploaded on 02/23/2011 for the course ECON 301 taught by Professor S.chiu during the Spring '11 term at HKU.

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exportsubsidy - University of Hong Kong Strategic Trade:...

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