ECOS3006 International Trade
Tutorial 10 (Week 12): Export Policies
Carlton Li
School of Economics
The University of Sydney
October 23, 2022
Carlton Li (University of Sydney) ECOS3006 International Trade October 23, 2022 1 / 16
Tutorial Outline
1 Key take-home messages from last week
2 Recap
Export Subsidy
Production Subsidy
Export Tariffs
Export Quotas
3 Tutorial Questions
Carlton Li (University of Sydney) ECOS3006 International Trade October 23, 2022 2 / 16
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Tutorial Outline
1 Key take-home messages from last week
2 Recap
Export Subsidy
Production Subsidy
Export Tariffs
Export Quotas
3 Tutorial Questions
Carlton Li (University of Sydney) ECOS3006 International Trade October 23, 2022 4 / 16
Key take-home messages from last week
1 An export subsidy in lead to deadweight loss
Consumers and government pay for it
In the large country case, there is a further terms of trade loss
2 Production subsidy is a more direct instrument to boost trade.
Still lead to DWL. Government pays but consumers are unaffected
The terms-of-trade loss is smaller in the large country case
3 A large country export quota / tariff has ambiguous welfare result
4 When the number of competitors is small - go Game Theory
Carlton Li (University of Sydney) ECOS3006 International Trade October 23, 2022 5 / 16
Tutorial Outline
1 Key take-home messages from last week
2 Recap
Export Subsidy
Production Subsidy
Export Tariffs
Export Quotas
3 Tutorial Questions
Carlton Li (University of Sydney) ECOS3006 International Trade October 23, 2022 6 / 16
Export Subsidy 1: Small country
Domestic price increases, because export subsidy distinguishes
between items sold at Home or exported
PS: +a+b+c; CS: -a-b; GS: -b-c-d = (S2 − D2)× s
Welfare result: -b-d
Carlton Li (University of Sydney) ECOS3006 International Trade October 23, 2022 7 / 16
Export Subsidy 2: Large country
Domestic price increases, because export subsidy distinguishes
between items sold at Home or exported
e is the terms of trade loss, due to lower export price
PS: +a+b+c; CS: -a-b; GS: b + c + d + e = (S2 − D2)× s
Net effect on welfare: -(b + d + e)
Carlton Li (University of Sydney) ECOS3006 International Trade October 23, 2022 8 / 16
Production Subsidy: Small country
Pw + s is only observed by producers. Consumers are not affected
because the production subsidy does not distinguish between items
sold at Home or exported
Export supply increases by smaller amount in world market
PS: +a+b ; GS: -a-b-c
Net welfare change: -c
Carlton Li (University of Sydney) ECOS3006 International Trade October 23, 2022 9 / 16
Production Subsidy: Large country
Increase in export supply is smaller, because production subsidy does
not ’crowd out’ domestic demand.
Reduction in world price (thus terms of trade loss) still occur. But the
positive supply shock in the world market is smaller
Carlton Li (University of Sydney) ECOS3006 International Trade October 23, 2022 10 / 16
Export subsidy vs. Production Subsidy
At the end of the day, the goal of the subsidy is to foster exporting
industry. i.e. increase the level of production/output
Export subsidy leads to greater DWL, and less directly on production
Production subsidy leads to lower DWL, and more directly on
production
Targeting Principle: best to use the policy instrument that achieves
the objective most directly
Carlton Li (University of Sydney) ECOS3006 International Trade October 23, 2022 11 / 16
Export Tariffs: Small Country
Domestic price decrease, as supplying to home market is now cheaper
CS: +a; PS: -a-b-c-d; GS: +c
Net welfare result: : -(b + d)
Carlton Li (University of Sydney) ECOS3006 International Trade October 23, 2022 12 / 16
Export Tariffs: Large Country
Domestic price decrease, as supplying to home market is now cheaper
Decrease in EX results in rise in world price - terms of trade gain
CS: +a; PS: -a-b-c-d ; GS: +c + e
Net welfare: e - (b + d)
Carlton Li (University of Sydney) ECOS3006 International Trade October 23, 2022 13 / 16
Export Quotas (Large country)
Domestic supply increase → Home price decrease
Constraint on EX results in rise in world price - terms of trade gain
CS: +a; PS: -(a+b+c+d) + (c+e)
Net welfare: e-(b+d)
Export Quota/Tariff can be equivalent, given competitive market
Carlton Li (University of Sydney) ECOS3006 International Trade October 23, 2022 14 / 16
Tutorial Outline
1 Key take-home messages from last week
2 Recap
Export Subsidy
Production Subsidy
Export Tariffs
Export Quotas
3 Tutorial Questions
Carlton Li (University of Sydney) ECOS3006 International Trade October 23, 2022 15 / 16
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Carlton Li (University of Sydney) ECOS3006 International Trade October 23, 2022 16 / 16