An export subsidy has a similar effect as a tariff for a small nation. What is the effect of an export subsidy for a large nation?
A) Losses are greater for the large nation than for the small nation because of the cost of the subsidy to the home government.
B) Losses are lower for the large nation than for the small nation.
C) It is beneficial for the large nation but not for the small nation.
D) It is beneficial for consumers but harmful for firms in the large nation.

Question

Quizplus · Accepted Answer

A large nation has greater capacity to produce goods and thus, an export subsidy may lead to an increase in production and exports, which benefits firms in the home country. However, the cost of the subsidy to the government may be higher for the large nation, leading to greater losses than for a small nation. Additionally, an export subsidy may cause distortion in global trade and result in retaliation by other countries. Therefore, overall losses may be greater for the large nation than for the small nation.

An Export Subsidy Has a Similar Effect as a Tariff