Suppose that the world price of sugar is $100 per ton.If a
Large country gives its sugar exporters a subsidy of $50 per
Ton, then there will be:
A)no change in its consumer surplus.
B)a loss in consumer surplus.
C)a gain in consumer surplus.
D)an increase in domestic consumption.

Question

Quizplus · Accepted Answer

When a country gives a subsidy to its sugar exporters, the domestic producers will produce more sugar, leading to a decrease in the price of sugar in the domestic market. As a result, the domestic consumers will benefit from lower prices, and hence there will be an increase in consumer surplus. However, since the country is exporting more sugar, the world price of sugar will decrease, leading to a decrease in the revenue earned by the domestic sugar producers. This will cause some of the domestic producers to exit the market, resulting in a loss of producer surplus. Thus, the net effect of the subsidy will be a loss in consumer surplus, which will be greater than the gain in producer surplus. Therefore, choice B is correct.

Suppose That the World Price of Sugar Is $100 Per