Suppose the world price of corn, P*, is higher than Mexicoâs 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 Mexicoâs 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 governmentâs subsidy expenditure in the above graph, identify the change in consumer surplus due to the removal of the export subsidy.
Sample Solution