Consider a small country that exports steel. Suppose that a \"pro-trade\" govern
ID: 1209179 • Letter: C
Question
Consider a small country that exports steel. Suppose that a "pro-trade" government decised to subsidize the export of steel by paing a certain amount for each ton sold abroad.
a. How does this export subsidy affect the domestic price of steel, the quantity of stell produced, the quantity of steel consumed, and the quantity of steel exported?
b. How does it affect consumer surplus, producer surplus, government revenue, and total surplus? I
c. Is it a good policy from the standpoint of economic efficiency?
It would be very appriciated if a-c would be answered clearly and accurately. Thank you!
Explanation / Answer
a) Since Government is giving subsidy only to the exported still so domestic supply will fall and domestic price will rise, Since price for domestic steel is increasing people will consume less steel. But output of steel will increase since after subsidy company can earn more profit than before.
b) Consumer surplus for domestic consumer will remain same or may decrease since price is rising. Producer's surplus will defnately increase.Government revenue will go down and total surplus will also go down.
C)From the economic efficiency perspective this kind of reservation policy leads to un efficient output in the economy since the firm who are producing better steel cannot compete in price. So over all level of economic efficiency will go down.