Aircraft manufacturers lobby their governments for subsidies, which they use to better compete with rival firms. Airbus SAS, based in Europe, and Boeing Co., based in the United States, are the only two major manufacturers of large commercial jet aircraft manufacturers. France, Germany, Spain, and the United Kingdom subsidize Airbus, which competes in the wide-body aircraft market with Boeing. The U.S. government decries the European subsidies to Airbus despite giving lucrative military contracts to Boeing, which the Europeans view as implicit subsidies.

This government's generosity does not magically appear. Managers at both Boeing and Airbus lobby strenuously for this support. For example, in 2015 (as of August), Boeing spent $13.2 million on lobbying and was represented by 65 lobbyists, including two former members of Congress.

Washington and the European Union have repeatedly charged each other before the World Trade Organization (WTO) with illegally subsidizing their respective aircraft manufacturers. In 2010, the WTO ruled that Airbus received improper subsidies for its A380 superjumbo jet and several other aircraft, hurting Boeing, as the United States charged in 2005. In 2012, the WTO ruled that Boeing and Airbus received improper subsidies. In 2015, the WTO agreed to investigate a complaint about Washington State subsidies to Boeing, and Boeing questioned government loans to Airbus. Thus, the cycle of subsidies, charges, agreements, and new subsidies continues.

If only one government subsidizes its firm, what is the effect on price and quantities in the aircraft manufacturing market? What happens if both governments subsidize their firms?

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If only one government subsidizes its aircraft manufacturer it creates an artificial advantage for t... View the full answer