Small Country Export Subsidy, we discussed the welfare implications of export subsidy and production subsidy for a small country. We will look at this problem in more detail here. 

Consider the following demand and supply system for country C (assume country C is small):

Country C’s demand for pizza is QC = 10 − P C.

Country C’s supply for pizza is QC = P C − 2.

a) Suppose the world price of pizza is $8 per unit and Country C is open to free trade. How many pizzas would Country C export? What is the gain from trade for Country C? (3 points)

b) Suppose the government of Country C wants to promote pizza production and puts a $2 per unit subsidy on each unit of pizza exported. Calculate the social welfare loss resulting from the export subsidy policy. Would the social welfare loss change if the world price of pizza is $10 per unit instead of $8 per unit? (4 points)

c) Mathematically show that a $2 per unit production subsidy will result in less welfare loss compared to the export subsidy in part b). Moreover, you should know this result even before you do the calculation. Briefly explain why.(4 points)

Answer rating: 100% (QA)

a Country Cs demand for pizza is QC 10 Pc and Country Cs supply for pizza is QC Pc 2 At the world pr... View the full answer