Based on your chapter readings, share your understanding of the following:
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.
1. 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?
2. How does it affect
- consumer surplus,
- producer surplus,
- government revenue, and
- total surplus?
3. 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)
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