Assignment task: An export subsidy is a policy adopted by the government to encourage exports of goods and services. By imposing subsidy on exports, the price of goods and services in the domestic country increases and sale decreases as well. Incentives are given by the government of a country to exporters to encourage exports of goods.
1. When export subsidy is imposed by the government by paying certain amount when each ton of steel is sold abroad, this will increase the price of steel in the domestic country. This increase in prices induces increase in the production of steel in the domestic country. There will be decrease in the quantity of steel consumed in the domestic country due to increase in the price of steel.
The production quantity is increased which increases the quantity exported to the foreign countries.
2. Consumer surplus in the domestic country decreases because consumers demand less steels due to increased price. The producer surplus on the other hand increases because of increase in price and production. Government revenue increases because of increase in the quantity of steel exported and more demand from the foreign country due to lower price.
The aggregate welfare effect for the country is summed up by the gain and losses to consumers and producers and when these components are negative, then there is reduction in the national welfare where some firms gains while some losses.
3. Export subsidy is implemented by the government for increasing the quantity of exports and encourages the outflow of goods and services from a domestic economy to the international market. It is good from the standpoint of economy efficiency because it protects the small industries and reduces cost of production for the businesses; it helps to increase the competitiveness of the company. This leads to a greater supply of goods and services which are beneficial for the economy because more revenues are generated that increases the total surplus of the economy.