Chapter_6_Non-tariff_Barriers

Gains these actions will also benefit industrial

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Gains These actions will also benefit industrial countries, suffering from deadweight losses from the combination of subsidies and tariffs.
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Who Gains and Who Loses? Losses Clearly the farmers in industrial countries who lose the subsidies will be worse off. Given that it is usually the largest farmers who gain the most from subsidy programs, they may be better able to adjust to the elimination of subsidies than smaller farmers. Given that eliminating subsidies will typically lead to increased world prices, food-importing countries, typically the poorer non-food producing countries, will lose. Note that industrial countries are large exporters of agricultural products. Elimination of subsidies to farmers in those countries will reduce output and the supply to the world market, leading to an increase in world prices.
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An Introduction to Production Subsidies The agreements reached in Hong Kong distinguish between export subsidies in agriculture and all other forms of domestic support that increase production . Tax incentives and other types of subsidies This is because it is expected that these other forms have less impact on exports than do direct subsidies. In the following we will examine the impact of a production subsidy in agriculture for a small country.
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Production Subsidies A production subsidy is when the government provides a subsidy of s dollars for every unit (for example, tons of sugar) that a Home firm produces. It is a subsidy to every unit produced, not just to units exported. The subsidy can be implemented by the government: guaranteeing a minimum price to the farmer. providing subsidies to the users of the crop to purchase it, thereby increasing demand for the crop and the price.
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Production Subsidies Effect of a Production Subsidy in a Small Home Country We have a small country with a fixed world price of PW. There is a subsidy of s increasing Home price to producers to PW+s. Home quantity supplied increases from S1 to S2. Quantity demanded at home does not change since producers still charge the world price at Home. This happens because Home producers receive the subsidy no matter who they sell to.
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Production Subsidies Effect of a Production Subsidy in a Small Home Country This contrasts with an export subsidy where Home firms only receive the subsidy for export sales and must sell to Home at the higher export price. You can see these effects in the next figure. The production subsidy increases exports to X2 = S2 – D1. The production subsidy increases exports by less than an export subsidy.
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C' X2 C B Production Subsidies World Price P W S1 D S X X (a) Home Market (b) World Market s PW+ s Home Price D1 Quantity S2 X1 Exports Subsidy increases price to producers increasing supply from S1 to S2. Home quantity demanded does not change.
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