1. The figure given below illustrates the impact of an export subsidy as imposed by a large
country. No imports are permitted.
P
a. Identify (indicate the letters for specific area(s)) the cost to the government of the
indicated subsidy as shown by area(s).
b. What is the net impact on the consumer surplus (indicate the letters for specific area(s))
of the export subsidy provided by the domestic government? Is it positive/negative?
c. What is the net impact on the producer surplus (indicate the letters for specific area(s))
of the export subsidy provided by the domestic government? Is it positive/negative?
d. Identify (indicate the letters for specific area(s)) production and consumption effects. Is
it positive/negative?
e. Identify (indicate the letters for specific area(s)) the net change in national welfare due
to the provision of the export subsidy by the domestic government?
Dd
World price with subsidy
D D1 S0 S1 Quantity
World price a b c d
e f g h i j
Domestic price with subsidy
2
2. With free trade the United States imports about half of its steel consumption from Brazil.
What would be the impact on the United States of an export subsidy on steel provided by the
Brazilian government? Would it be beneficial for the U.S. if they impose an equal amount of
countervailing duty on the import of steel? Why or why not?
World price
Quantity (millions of tons)
Export
U.S. demand for steel
130
U.S. supply of steel
v w y z
150 200 210
Domestic price with subsidy