Explain how subsidies affect the price of domestic and export products. FIGURE 5.4 Trade and Welfare Effects

Explain how subsidies affect the price of domestic and export products.

 

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FIGURE 5.4 Trade and Welfare Effects of Subsidies Price (Dollars) 430 425 400 (a) Domestic Production Subsidy Su.s.o B 2 9 Su.s.1 Subsidy 7 14 Steel (Millions of Tons) Sw DUSA 5 Price (Dollars) 2 (b) Export Subsidy A Su.s. World Price + Subsidy World Price 4 6 8 10 Wheat (Millions of Bushels) Du.s. A government subsidy granted to import-competing producers leads to increased domestic production and reduced imports. The subsidy revenue accruing to the producer is absorbed by producer surplus and high-cost production (protective effect). A subsidy granted to exporters allows them to sell their products abroad at prices below their costs. However, it entails a deadweight welfare loss to the home country in the form of the protec- tive effect and the consumption effect. FIGURE 5.4 Trade and Welfare Effects of Subsidies Price (Dollars) 430 425 400 (a) Domestic Production Subsidy Su.s.o B 2 9 Su.s.1 Subsidy 7 14 Steel (Millions of Tons) Sw DUSA 5 Price (Dollars) 2 (b) Export Subsidy A Su.s. World Price + Subsidy World Price 4 6 8 10 Wheat (Millions of Bushels) Du.s. A government subsidy granted to import-competing producers leads to increased domestic production and reduced imports. The subsidy revenue accruing to the producer is absorbed by producer surplus and high-cost production (protective effect). A subsidy granted to exporters allows them to sell their products abroad at prices below their costs. However, it entails a deadweight welfare loss to the home country in the form of the protec- tive effect and the consumption effect.

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