Let´s talk something about subsidies... Subsidy is a payment to a firm or individual that ships a good abroad. The effects of an export subsidy on prices are exactly the reverse of those of a tariff. Effects in exporting country: consumers are hurt (exporting country´s price rises, importing country´s price decreases), producers gain (they support volume of export in H country), the government loses (it must expend money on the subsidy). An export subsidy leads to costs that exceed its benefits.

Exercise Home´s demand curve cheese is: D = P supply curve for cheese is: S = P Foreign´s demand curve: D*= P* supply curve: S*= P* The Home´s government has expended an export subsidy on cheese. s = 0,5 € (per unit) Calculate: equilibrium price for Home (P), for Foreign (P*) and world price (Pw). Graph: Home’s import demand (MD*) and Foreign´s export supply (XS). Calculate: producer gain, consumer loss, cost of government subsidy, efficiency loss.