Consider a small country that exports steel. Suppose that a "pro-trade" government decides to subsidize the export of steel by paying a certain amount for each ton sold abroad.
- How does this export subsidy affect the
domestic price of steel,
the quantity of steel produced,
the quantity of steel consumed, and
the quantity of steel exported?
- How does it affect
consumer surplus,
producer surplus,
government revenue, and
total surplus?
- Is it a good policy from the standpoint of economic efficiency? (Hint: the analysis of an export subsidy is similar to the analysis of a tariff)
Sample Solution