Free Trade | |
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Under free trade, where the world price is PW:
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Subsidy | |
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If the government promises to pay a subsidy to exporters to
encourage exports, exporters will export this good up to the point
where the domestic price exceeds the foreign price by the amount
of subsidy. If this economy is large, the increase of production by subsidy will decrease the world price to P'W. Domestic producers receive (P'W + S) per unit that they export, where S is the amount of subsidy per unit of X exported. Therefore, producers: For this policy, the government must pay [P'W + S) - P'W] x (X4 - X3) = S(X4 - X3) |
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