Chapter_6_Non-tariff_Barriers

A fixed amount or a fraction of the sales price

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A fixed amount or a fraction of the sales price. Governments give subsidies to encourage domestic firms to increase production in particular industries. Europe maintains a system of agricultural subsidies known as the Common Agricultural Policy (CAP). The U.S. pays cotton farmers to grow more cotton and subsidizes agribusiness and manufacturers to buy the American cotton. Using the tools we have developed up to now, we examine the effects of export subsidies on prices, the amount of trade, and welfare.
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Export Subsidies in a Small Country We start with a small Home country. Faces a fixed world price for its export. Home country will export sugar. No trade equilibrium is at point A (see the next figure). World price of PW, Home quantity supplied at S1, quantity demanded at D1, and exports X1=S1-D1. Quantity of exports is point B in panel (b) at free trade price of PW and export supply curve, X.
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Export Subsidies in a Small Country World Price Home Price Quantity Exports D S X B X1 Home export supply Foreign import demand A S1 D1 X1 PW The free trade equilibrium at world price PW, gives exports of X1 and a horizontal Foreign import demand. Equilibrium is at B.
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Export Subsidies in a Small Country 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 PW+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 PW+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 PW+s.
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Export Subsidies in a Small Country Impact of an Export Subsidy Home consumers could just import sugar at the world price, PW. 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 PW+s, Home supply increases to S2, Home demand falls to D2, Home exports increase to X2=S2- D2.
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Export Subsidies in a Small Country World Price Home Price Quantity Exports D S X B A S1 D1 X1 PW PW+s C With the subsidy, the Home price rises to PW+s This decreases demand to D2, increases supply to S2, and increases exports to X2. Equilibrium is at C. X2 D2 X2 S2 X–s C' s s The Home export supply curve shifts down by exactly the amount of the subsidy. MC of production falls by exactly s. X1
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Export Subsidies in a Small Country Impact of an Export Subsidy The change in the quantity of exports can be thought of in two ways reflected by points C and C’ in panel (b).
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