| Front | Back | | --- | --- | | A government introduces a production subsidy on an import-competing good. Predict the effect on:
1. Domestic price paid by consumers
2. Domestic quantity demanded
3. Quantity imported |

1. Domestic price paid by consumers: Unchanged (remains at $P_w$).
2. Domestic quantity demanded: Unchanged (remains at $Q_2$).
3. Quantity imported: Decreases (as domestic production increases).

| | A government introduces a production subsidy on an import-competing good. Predict the effect on:
1. Domestic producer surplus
2. Government budget |

1. Domestic producer surplus: Increases (producers receive $P_w + s$).
2. Government budget: Decreases / Negatively affected (due to subsidy expenditure).

| | Explain why a production subsidy on import-competing goods leads to global allocative inefficiency (welfare loss). | It protects inefficient domestic producers who have higher marginal costs than more efficient foreign producers, leading to a waste of scarce resources. | | A government introduces an export subsidy on a domestic good. Predict the effect on:
1. Domestic price paid by consumers
2. Domestic quantity demanded
3. Quantity exported |

1. Domestic price paid by consumers: Increases to $P_w + s$.
2. Domestic quantity demanded: Decreases (due to the higher price).
3. Quantity exported: Increases (domestic excess supply expands).

| | A government introduces an export subsidy. Predict the effect on:
1. Consumer surplus
2. Producer surplus
3. Welfare loss (compared to a production subsidy) |

1. Consumer surplus: Decreases (consumers pay more and buy less).
2. Producer surplus: Increases (producers receive a higher price and sell more).
3. Welfare loss: Higher (distorts both production and consumption).

| | Why does an export subsidy cause the domestic consumer price to rise to $P_w + s$, while a production subsidy leaves it at $P_w$? | With an export subsidy, firms can earn $P_w + s$ by exporting. To sell domestically, they demand the same price, making domestic supply scarce and driving the domestic price up to $P_w + s$. Under a production subsidy, imports still enter freely at $P_w$. | | Why is the domestic price increase resulting from an export subsidy considered regressive? | The higher price of the subsidized good takes up a larger proportion of lower incomes, disproportionately harming lower-income households. | | Total government expenditure on a production subsidy is calculated as the unit subsidy multiplied by the new domestic quantity supplied, while the welfare loss is due to inefficient domestic production. | Total government expenditure on a production subsidy is calculated as the unit subsidy multiplied by the new domestic quantity supplied, while the welfare loss is due to inefficient domestic production. | | Under free trade before an export subsidy, the economy operates at a world price that is above the domestic equilibrium price, resulting in an excess supply which is exported. | Under free trade before an export subsidy, the economy operates at a world price that is above the domestic equilibrium price, resulting in an excess supply which is exported. | | The total government expenditure on an export subsidy is calculated as the unit subsidy multiplied by the quantity exported, which is equivalent to domestic quantity supplied minus domestic quantity demanded. | The total government expenditure on an export subsidy is calculated as the unit subsidy multiplied by the quantity exported, which is equivalent to domestic quantity supplied minus domestic quantity demanded. | |

Refer to the production subsidy diagram. Identify which lettered area represents:
1. The increase in producer surplus
2. The deadweight/welfare loss

1. Increase in producer surplus: a
2. Welfare loss: b

| |

Refer to the export subsidy diagram. Identify which lettered areas represent:
1. The loss in consumer surplus
2. The total welfare (deadweight) loss

1. Loss in consumer surplus: a + b
2. Total welfare loss: b + d

| |

Refer to the production subsidy diagram. Why does the domestic supply curve shift vertically downwards from $S_{d1}$ to $S_{d2}$?

| The shift represents the government subsidy per unit ($s$), which effectively lowers the marginal costs of production for domestic firms. | | How is the unit subsidy ($s$) calculated from a production or export subsidy diagram with two domestic supply curves ($S_{d1}$ and $S_{d2}$)? | By finding the vertical distance between the two domestic supply curves at any given quantity. | | State the formula to calculate the change in domestic producer revenue after a production subsidy is introduced. | $$\Delta \text{Revenue} = [ (P_w + s) \times Q_{\text{new}} ] - [ P_w \times Q_{\text{initial}} ]$$ | | State the formula to calculate total government expenditure on an export subsidy. | $$\text{Government Expenditure} = s \times (Q_4 - Q_3)$$
Where $Q_4$ is the new domestic quantity supplied, and $Q_3$ is the new domestic quantity demanded. | | How is the welfare loss (deadweight loss) of an export subsidy calculated using the two triangle areas ($b$ and $d$)? | $$\text{Welfare Loss} = \frac{s \times \Delta Q_d}{2} + \frac{s \times \Delta Q_s}{2}$$
Where $\Delta Q_d$ is the reduction in quantity demanded, and $\Delta Q_s$ is the increase in quantity supplied. | | Based on the EU agricultural export subsidy case study, what is a major negative consequence of domestic export subsidies on producers in developing countries? | Subsidized exports flood foreign markets at artificially low prices, undercutting local producers and damaging their local industry. | |

| Dd | |

| Sd2 | |

| Sd1 | |

| b | |

| Dd | |

| Sd2 | |

| a | |

| Sd1 |

1. Introduction to Economics2 subtopics

2. Microeconomics12 subtopics

3. Macroeconomics7 subtopics

4. The Global Economy10 subtopics

IB Economics 4.2.3 Subsidy/export Subsidy Flashcards

1. Introduction to Economics2 subtopics

2. Microeconomics12 subtopics

3. Macroeconomics7 subtopics

4. The Global Economy10 subtopics

Flashcards for 4.2.3 Subsidy/Export Subsidy

Flashcards for 4.2.3 Subsidy/Export Subsidy - IB