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 the country subsidizes its sugar exporters, they can sell their sugar at a lower price in the international market, which will decrease the world price of sugar. This will lead to a decrease in the domestic price of sugar in the country, and an increase in domestic consumption. However, because the subsidy is greater than the decrease in the world price of sugar, the domestic price of sugar will still be higher than it would without the subsidy. As a result, domestic consumers will face a loss in consumer surplus.

Suppose That the World Price of Sugar Is $100 Per