Answer to Question #322960 in Microeconomics for MAA

Question

Consider a small country that exports steel. Suppose that a ‘protrade’ government decides to subsidize the export of steel by paying a certain amount for each tonne sold abroad. 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? How does it affect consumer surplus, producer surplus, government revenue, and total surplus? (Hint: The analysis of an export subsidy is similar to the analysis of a tariff.)

Answer 1

The subsidy on export will increase the domestic price of steel to minimize its consumption rates within the domestic market. However, it will raise the consumption rate within the foreign markets since the steel selling price will be decreased for the foreign importers. The steel quantity will increase due to increased demand in the foreign market, and the exported steel will appreciate since the foreign importers will have a high affordability rate.

There will be a decrease in the consumer surplus due to the export subsidy since there will be a decrease in consumption in the exporting country due to the high steel prices within the domestic market. There will be an increase in the production surplus due to increased demand in foreign countries due to the export subsidy. Government revenue will increase due to the increases in the exportation taxes earned from steel exportation to foreign markets. The total surplus will have favored the domestic producers more than consumers since there are high prices that effaced their purchasing power. The producers will have a chance of making more profits due to their exposure to new customers and markets.