Chapter_6_Non-tariff_Barriers

We can see in b that home export supply increases

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We can see in (b) that Home export supply increases, showing that exports increase from X1 to X2. This is a smaller increase than with an export subsidy since Home demand does not change.
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Production Subsidies Home Welfare Producer surplus rises by (a+b) in panel a. Government cost of the subsidy is (a+b+c) – the amount of subsidy s times total production S2. Consumer surplus is unaffected since quantity demanded is unaffected. This leaves a new effect on Home welfare of (–c). The deadweight loss caused by the production subsidy, (c), is less than that caused by the export subsidy, (b+d). The only deadweight loss is in production inefficiency —producers produce at higher than marginal cost.
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C B C' Production Subsidies World Price P W S1 X2 D S X X s (a) Home Market (b) World Market PW+ s Home Price S2 D1 Quantity a c b X1 Exports Home producer surplus rises by (a+b) Subsidy costs government (a+b+c) Deadweight loss from production subsidy is c, which is less than with export subsidy of (b+d) .
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Production Subsidies Targeting Principle Since the deadweight loss is lower for this subsidy than for the export subsidy, it makes a better policy instrument for the purpose of increasing Home supply. This is an example of the targeting principle. To achieve some objective, it is best to use the policy instrument that achieves the objective most directly. It is better to provide trade adjustment assistance directly to those affected, than to impost a tariff or quota.
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