Chapter_6_Non-tariff_Barriers

If we measure home price on the vertical axis c is on

Info icon This preview shows pages 46–53. Sign up to view the full content.

View Full Document Right Arrow Icon
If we measure Home price on the vertical axis, C is on the original Home export supply curve, showing a movement along the curve. As the Home price has increased, the quantity of Home exports has increased from B to C. If we use the vertical axis as world price, which is fixed in our small country, the increase in exports due to the subsidy can be interpreted as a shift of the domestic export supply curve – point C′.
Image of page 46

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Export Subsidies in a Small Country Impact of an Export Subsidy Export subsidies increase both the price and quantity of exports. A movement along the domestic export supply curve. For the world perspective, the export subsidy results in an increase in export supply. Given the fixed world price, this means the export supply curve shifts down by the amount of the subsidy, s. As with a tariff, the subsidy has driven a wedge between what domestic exporters receive (PW+s), and what importers abroad pay (PW).
Image of page 47
Export Subsidies in a Small Country The increased price decreases consumer surplus by (a+b) The subsidy costs the government the amount –(b+c+d) World Price Home Price Quantity Exports D S X B A S1 D1 X1 PW PW+s C D2 X2 S2 X2 X–s C' s s Producer surplus increases by (a+b+c) a b d This leaves us with a deadweight loss of (b+d) . c Total deadweight loss, b+d
Image of page 48

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Export Subsidies in a Small Country Impact of the Subsidy on Home Welfare The rise in price lowers consumer surplus by (a+b ). The rise in price raises producer surplus by (a+b+c ). The export subsidy costs the government the amount of the subsidy, s, times the amount of exports, X2 shown by (b+c+d ). Adding up this impact, we are left with a net effect on Home welfare of –(b+d ).
Image of page 49
Export Subsidies in a Small Country Impact of the Subsidy on Home Welfare The deadweight loss due to the subsidy in a small country is similar to the effects of a tariff. Areas b and d have particular meanings. Triangle d equals the increase in marginal costs for the extra unit produced due to the subsidy. This is the production loss or efficiency loss for the economy. Triangle b is the drop in consumer surplus for those who no longer get to the consumer. This is the consumer loss for the economy.
Image of page 50

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Who Gains and Who Loses? Let’s return to the Hong Kong meeting of the WTO in December 2005 to see which countries will gain and which will lose when the export subsidies are eliminated by 2013. Gains Obvious winners will be current agricultural exporters in developing countries such as Brazil, Argentina, Indonesia, and Thailand, along with potential exporters such as India and China. These countries will gain even more when and if an agreement is reached on eliminating agricultural tariffs in the industrial countries.
Image of page 51
Who Gains and Who Loses?
Image of page 52

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 53
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern