chapter6 (4) - Impact of an Export Subsidy Suppose the...

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Impact of an Export Subsidy Suppose the government wants to boost domestic exports of sugar. Each ton of sugar exported receives a subsidy, s. Exporters will receive P W +s for each ton exported. They are allowed to export all they want at the subsidized price and Home firms will not accept a price less than P W +s. If domestic price was lower than P W +s, the firms would just export their goods instead. Therefore, the domestic price must rise to P W +s. Impact of an Export Subsidy Home consumers could just import sugar at the world price, P W . Therefore, Home will impose a tariff equal to or higher than the amount of the export subsidy. This typically happens and, is therefore, realistic. The combined effect of the subsidy and the tariff is to raise the price at Home. Price is P W +s, Home supply increases to S 2 , Home demand falls to D 2 , Home exports increase to X 2 =S 2 -D 2 . Impact of an Export Subsidy
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This note was uploaded on 02/16/2012 for the course EC 340 taught by Professor Ballie during the Spring '10 term at Michigan State University.

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chapter6 (4) - Impact of an Export Subsidy Suppose the...

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