A subsidy granted to an import-competing producer tends to be absorbed by producer surplus and higher-costs of production.

Question

Quizplus · Accepted Answer

When a subsidy is granted to an import-competing producer, it allows them to lower their costs of production and increase their supply, which in turn increases producer surplus. However, because the subsidized producer is now able to offer their goods at a lower price, domestic producers who do not receive the subsidy may face higher costs of production as they struggle to compete. This can cause a shift in producer surplus from non-subsidized producers to the subsidized producer, as well as a decrease in consumer surplus due to higher prices for consumers.

A Subsidy Granted to an Import-Competing Producer Tends to Be