Suppose the world price of corn, P*, is higher than Mexico’s autarky price, and Mexico currently offers its corn producers an export subsidy $s/unit. Use a domestic-market graph to:

a. show the effect of removing the export subsidy on Mexico’s domestic price, domestic supply, domestic demand, export quantity, consumer surplus, producer surplus, and government expenditure assuming that Mexico is a small country;

b. Assuming that consumers are also taxpayers that used to pay for the government’s subsidy expenditure in the above graph, identify the change in consumer surplus due to the removal of the export subsidy.

Sample Solution