Question

For the US export subsidy program: Assuming an export subsidy is paid on a per unit basis for products sold outside of the US, other things equal, we would expect that

a) expected price of product in US would: Increase, Decrease, It Depends

b) expected quantity produced in US would: Increase, Decrease, It Depends

c) expected price of product outside of US would: Increase, Decrease, It Depends

d) expected quantity sold outside of US would: Increase, Decrease, It Depends

Answer 1

(A)  expected price of product in US would: Increase. This is because more and more producer will produce the good and export more and sell less products in the domestic market. This would reduce the domestic supply of the good which raises the price of the product.

(B) expected quantity produced in US would: Increase. This is because producers are getting export subsidy for each unit they produce and export. So, they will produce more.

(C) expected price of product outside of US would: It depends. This is because of the competition the goods are facing in the international market. If they face high degree of competition, then price decreases and if they face less or no competition, the price may increase.

(D) expected quantity sold outside of US would: It Depends. This is because US exporters will export more, their supply of goods in the international market increases but it depends on the buyers in the international market whether they buy it or not. Their decision depends upon the availability of substitute goods, price of compelement goods, etc.