Export Subsidies

Export Subsidies (AO3, AO4)

Export subsidies are a second way the government can assist producers. By giving firms extra money for exporting their goods, exports can increase. 

This diagram explains how an export subsidy works:

Before export subsidy:

• Domestic producers produce at Q3, because price is at P1

• Consumers consume at Q2, because price is at P1

• Hence, the rest is exported (Q2 <-> Q3)

After export subsidy:

• Domestic producers get a subsidy of P1 <-> P2, so they produce as if the price is P2, so at Q4

• Since producers get a higher price exporting, they are only willing to sell domestically if they get the same price P2

• This means domestic consumers now have to pay P2 instead of P1, reducing their demand from Q2 to Q1

• Hence, the new exported amount is Q1 <-> Q4

Effect on Consumers

• Because firms can now earn more money by exporting, they are only willing to sell domestically if they can sell at the same price as abroad.

• This means consumers now have to pay more money for the same product, decreasing their surplus

Effect on Producers

• Firms now get to sell more of their products while also earning more per product, in the form of payments from the government. 

• This means domestic producers have increased their surplus significantly

Effect on the Market (Consumers+Producers)

• Because the producer gain is larger than the consumer loss, the market experiences a positive surplus change

Effect on the Government

• The government has to dish out a subsidy (shown as the blue rectangle on the first diagram on this page), which is taxpayer money it could have spent on other things (opportunity cost)

• A welfare loss is still created, as some of the subsidy does not translate to surplus for producers (see the two blue triangles). This is because due to the subsidy, producers are not as incentivized to produce as efficiently as before