When assessing the welfare effect of an export subsidy on a small nation, it can be shown that the subsidy:
A) increases national welfare.
B) can be paid for out of increased revenues.
C) hurts producers and helps consumers.
D) is just the same as a tariff on imports: it raises domestic price, increases domestic production, and involves the same efficiency and consumption losses.

Question

Quizplus · Accepted Answer

Export subsidies in a small nation typically raise the domestic price of the subsidized good, which encourages domestic production. However, they also lead to efficiency losses because they distort market signals and resource allocation. Additionally, they can lead to consumption losses as domestic prices rise, making goods more expensive for local consumers. This is somewhat analogous to the effects of a tariff on imports, which also raises domestic prices and distorts market efficiency, even though the mechanisms and direct impacts on consumers and producers differ.

When Assessing the Welfare Effect of an Export Subsidy on a Small