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Consider a small country that imports good Z. Some of the total quantity of Z domestically...

Consider a small country that imports good Z. Some of the total quantity of Z domestically consumed is supplied by domestic producers and the rest of it is imported. Then suppose that the government pays a subsidy of S dollars on each unit of Z that is produced domestically, so that the quantity of Z imported is somewhat reduced (but not reduced to zero). Draw a demand and supply diagram that shows the effect of the subsidy. Compare this subsidy to a tariff. Explain why the subsidy is generally regarded as the more desirable policy instrument.

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Rahul Sunny answered 2 years ago
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