4.2.3—Subsidies and export subsidies

A subsidy lowers a producer’s effective cost; an export subsidy additionally rewards sales abroad and can alter domestic availability and trade flows.

A domestic production subsidy can increase supply and lower price, but it uses government funds. An export subsidy encourages firms to sell abroad; domestic consumers may face a higher price or reduced availability, while fiscal cost and trade retaliation are possible.

Name the recipient, the market affected and the budget cost before calling a subsidy beneficial.

A government pays 3 per unit of solar panels produced. Output may expand and learning may lower costs, but taxpayers fund the payment and the result depends on whether the subsidy fixes a genuine spillover.

“Subsidy” does not mean free: the opportunity cost is public spending, and an export subsidy is not the same as a consumer discount.

For a domestic production subsidy in a small open economy, keep the consumer price at $P_w$ and shift domestic supply right/down by the per-unit subsidy: domestic output rises, imports fall, consumers are unchanged, producers receive $P_w+$ subsidy per unit and government cost equals subsidy × post-subsidy domestic output. The excess government cost beyond producer-surplus gain is a production deadweight-loss triangle. An export subsidy instead raises the return from exporting and can lift the domestic price, benefiting producers while harming domestic consumers and adding fiscal cost. Label which subsidy the diagram represents.