Suppose computer chips are made locally AND sold both locally and overseas. And
ID: 1248183 • Letter: S
Question
Suppose computer chips are made locally AND sold both locally and overseas. And suppose the government wants to increase exports of them. The government decides to either give a subsidy to the producers of $10 for every unit exported, or give a subsidy to the producers of $10 for every unit they manufacture. Which of these 2 choices would the producers prefer? Which would consumers prefer?
The answer given in my book is:
* the producers wouldn’t care because either way, the local price would rise by the same amount.
* the consumers would prefer the subsidy be given for every unit manufactured, because then the local price would not rise at all
I don’t understand this. Please help. Thank you.
Explanation / Answer
For part a of this question consider the essence of a subsidy. It is basically giving a person or company money to perform a specific behavior. The main motive of a firm is to maximize profit which is total revenue minus total cost. In the case of the subsidy, the government is increasing the total revenue of the company by the same $10 no matter what action the company takes. Thus, it is indifferent between the two actions. For the consumers, they would prefer the subsidy for every unit because, the company would not be biased to selling to foreigners at a lower price at the expense of domestic consumers.