An Explanation of Export Subsidies
- Both subsidies and export subsidies lower the cost of production for domestic firms
- They can increase output and lower prices
- With lower prices their goods/services are more competitive internationally
- If firms are able to meet all of the domestic demand (Dd) then the excess supply may be exported
- Otherwise, the level of imports will decrease
- The increased output may result in increased domestic employment
- Following the 2nd World War, the European Union subsidised food production and this has continued ever since
- Once food security had been established within Europe, countries were able to start exporting the excess supply that subsidies generate
- Once food security had been established within Europe, countries were able to start exporting the excess supply that subsidies generate
European Union subsidies for truffle producers shift the domestic supply curve to the right which decreases the level of truffle imports required from Q1Q3to Q2Q3
Diagram Analysis
- The domestic market for truffles in the EU was initially in equilibrium at PwQ3
- Domestic firms supplied up to Q1, while Q2-Q1 was imported into the EU
- Domestic firms supplied up to Q1, while Q2-Q1 was imported into the EU
- The implementation of the subsidy lowered firms costs of production, shifting the domestic supply curve from Sd to Sd + subsidy
- Domestic firms increase output and market share from Q1→Q2
- Imports reduce from Q1Q3 → Q2Q3