Consider a market that has been opened up to international trade, so that the good in question is sold in the domestic market at a price PW that is below the domestic autarkic equilibrium price P*. The government decides to put a subsidy of s dollars on each imported unit of the good. Show using a supply and demand graph, and clearly state, how this policy affects the price at which the good is bought and sold domestically, the quantity bought by domestic consumers, the quantity sold by domestic producers, and the number of imports. Using appropriately labeled points on the graph, clearly tabulate ΔCS, ΔPS, GR, and ΔSS. Is there an efficiency gain or efficiency loss here? What area on the graph is it represented by? What is the economic reason for the gain or loss?

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When a subsidy is implemented on each imported unit of a good it effectively reduces the cost of production for domestic producers This leads to an in... View the full answer