What is the most likely effect of export subsidies on the domestic country? A A decrease in prices and a decrease in consumer surplus. B An increase in prices and a decrease in consumer surplus. C An increase in prices and an increase in consumer surplus
Added by Charles K.
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Step 1: An export subsidy effectively increases domestic production for export, shifting the domestic supply curve to the right (more supply at each price). Show more…
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When the government subsidizes a good by paying $2 to the buyer for each unit purchased, it has the following effects on different concepts: Consumer surplus: Increases, The subsidy effectively lowers the price for consumers, meaning they are willing to pay more than they actually pay. This gap between their willingness to pay and the actual price paid widens, increasing consumer surplus. Producer surplus: Increases, Since the government directly pays producers $2 for each unit sold, their revenue per unit increases. This expands the gap between the price received and the minimum acceptable price (marginal cost), leading to a larger producer surplus. Tax revenue: Decreases or remains unchanged. Subsidies themselves do not directly generate tax revenue. In fact, the government incurs costs by providing the $2 for each unit sold. Depending on the tax system, some of the increased producer surplus due to the subsidy may be taxed, potentially offsetting some of the cost. However, overall, the subsidy is a drain on government resources and likely decreases tax revenue. Total surplus: Increases initially. The combined increase in consumer and producer surplus indicates a larger total surplus, representing a greater overall benefit to consumers and producers. However, it's important to consider: Deadweight loss: Yes, a subsidy can lead to a deadweight loss. While both consumer and producer surplus increase, the cost of the subsidy to the government represents a deadweight loss. This is because the resources used for the subsidy could have been used for other purposes with potentially higher social benefits. The increased consumption due to the subsidy may not be efficient, as production exceeds the equilibrium level without the subsidy.
Breanna O.
The world price can be higher than the domestic price; this generates exports rather than imports. Suppose we have such a situation in an open economy. Select the false statement. a) If consumers suddenly prefer to consume more of the good, the price that they have to pay might still not change. b) Compared to a situation without any trade (i.e. without exports), domestic producer surplus is smaller in the open economy. c) Compared to a situation without any trade (i.e. without exports), consumer surplus is smaller in the open economy. d) Suppose the government imposed an export duty - a tax on each unit exported (this occurs in some countries for agricultural products). Then consumer surplus increases and domestic producer surplus decreases.
Rashmi S.
Akash M.
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