1. Economic Effects of Export Subsidies in a Small Country

2. Export subsidies A specific subsidy is a payment per unit exported.
An export subsidy can also be specific or ad valorem
A specific subsidy is a payment per unit exported.
An ad valorem subsidy is a payment as a proportion of the value of exported unit.
An export subsidy raises the price of a good in the exporting country, decreasing its consumer surplus and increasing its producer surplus.
Also, government revenue will decrease

3. Export subsidies
An export subsidy raises the price of a good in the exporting country, while lowering it in foreign countries.
Programs which increase prices in the domestic market or directly subsidize the amount of production by domestic firms encourage over-production
Often surpluses are exported to other countries at artificially low prices through dumping.

4. Export subsidies Let’s analyze the effect of an export subsidy.
When domestic firms are exporters, they should have a comparative (cost) advantage, so the cost of production is low relative to the price in world markets.
With an export subsidy, domestic firms should be
willing to produce and to export more.
willing to sell less to domestic buyers if they can earn more revenue by exporting to foreign buyers.

5. Export subsidies
The price in the domestic market should increase with the export subsidy when domestic firms sell less of the product there.
In other words, domestic consumption should decrease with an export subsidy even though domestic production and sales increase.

6. The Economic Effects of An Export subsidy
Price of smart phones
Domestic
demand
Domestic supply
Domestic price with subsidy C Q D 2 F J Q S 2
Export subsidy
World price
Domestic price without subsidy
Gain in producer surplus Q D 1 Q S 1
Exports without subsidy
Quantity of smart phones
Because the export market becomes more profitable, less is sold domestically at a higher price.
Exports
with subsidy

7. The Economic Effects of An Export subsidy
Price of smart phones
Domestic
demand
Loss in consumer surplus
Domestic supply
Domestic price with subsidy C Q D 2 F Q S 2
Export subsidy
World price
Domestic price without subsidy Q D 1 Q S 1
Exports without subsidy
Quantity of smart phones
Because the export market becomes more profitable, less is sold domestically at a higher price.
Exports
with subsidy

8. The Economic Effects of An Export subsidy
Price of smart phones
Domestic
demand
Total earned from/ paid for subsidy
Domestic supply
Domestic price with subsidy Q D 2 F J Q S 2 D
Export subsidy
World price
Domestic price without subsidy Q D 1 Q S 1
Exports without subsidy
Quantity of smart phones
Because the export market becomes more profitable, less is sold domestically at a higher price.
Exports
with subsidy

9. The Economic Effects of An Export subsidy
Price of smart phones
Losses from inefficient (expensive) domestic production relative to efficient (inexpensive) foreign production, paid for by the government/taxpayers.
Domestic
demand
Domestic supply
Domestic price with subsidy Q D 2 F Q S 2 D
Export subsidy
World price
Domestic price without subsidy
Losses from domestic consumers who are no longer able to afford smart phones. Q D 1 Q S 1
Exports without subsidy
Quantity of smart phones
Because the export market becomes more profitable, less is sold domestically at a higher price.
Exports
with subsidy

10. The Economic Effects of An Export subsidy
The gains for domestic firms are represented by areas C + F + J.
Domestic firms can sell at a higher price.
Domestic firms can produce and sell a higher quantity (from QS1 to QS2).
The cost to the government to pay for the subsidy is represented by areas F + J + D.

11. The Economic Effects of An Export subsidy
Losses for consumers are represented by areas C + F.
Some consumers buy a product that now has a higher price charged by domestic producers.
The loss for these consumers is represented by area C.
Some consumers can no longer afford to buy the product.
The loss for these consumers is represented by area F.
The quantity bought by domestic consumers decreases from QD1 to QD2.

12. The Economic Effects of An Export subsidy
The deadweight loss for the country as a whole is represented by areas F + D.
These losses occur because
some consumers can no longer afford to buy the product and
less efficient and more expensive production by domestic firms