Based on your chapter readings, share your understanding of the following:

Consider a small country that exports steel. Suppose that a “pro-trade” government decides to subsidize the export of steel by paying a certain amount for each ton sold abroad.

1. How does this export subsidy affect the

  1. domestic price of steel,
  2. the quantity of steel produced,
  3. the quantity of steel consumed, and
  4. the quantity of steel exported?

2. How does it affect

  1. consumer surplus,
  2. producer surplus,
  3. government revenue, and
  4. total surplus?

3. Is it a good policy from the standpoint of economic efficiency? (Hint: the analysis of an export subsidy is similar to the analysis of a tariff)

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