A domestic subsidy in an open market
| English | 中文 | Pinyin |
|---|---|---|
| production subsidy/prəˈdʌkʃn ˈsʌbsɪdi/ | 生产补贴 | shēng chǎn bǔ tiē |
| world price/wɜːld praɪs/ | 国际市场价格 | guó jì shì chǎng jià gé |
A decision you can investigate
- A government pays domestic berry growers 2 yuan for each box produced. Foreign suppliers still offer berries at 10 yuan.
- Supporting home output need not raise the price paid by consumers in this model.
Build the explanation
- A per-unit production subsidy 生产补贴 shifts home supply right by reducing the net cost of supplying each unit. With unrestricted imports at a fixed world price 国际市场价格, buyers can still purchase at that price.
- Home producers receive the market price plus the subsidy. Imports meet the gap between domestic demand and subsidized domestic supply. This differs from a tariff that raises the domestic buyer’s price.
Work through the evidence
- In the stated small-country case, price stays 10 and demand stays 100 boxes. Home supply rises from 40 to 50 with the subsidy. Imports fall from 60 to 50.
- The government pays 2 × 50 = 100 yuan. Producers receive 12 per box including the subsidy, while consumers pay 10. The policy supports home output without the tariff’s price rise under these assumptions.
How many boxes are imported after the subsidy?
Demand 100 minus home supply 50 gives imports 50.
What does the consumer pay per box under the model?
Available world supply keeps the buyer’s price at 10.
A subsidy costs nothing when the consumer price stays unchanged.
The public payment still needs funding and uses resources with alternative purposes.
Test the limits
- The public payment uses tax revenue or borrowing and has an opportunity cost. Some payments support output that would have been produced anyway.
- World price availability, competition and unchanged demand are assumptions. An import quota, transport barrier or large-country price response could change the result. Do not conclude that a subsidy is costless because consumers’ price stays unchanged.
What is the producer’s receipt including subsidy?
The market payment 10 plus public subsidy 2 equals 12.
Apply and explain your answer
- Why is public cost based on 50 boxes rather than the additional 10?
- The stated payment applies to all eligible domestic production, not only its increase.
Match the terms to their meanings.
Each term describes a specific mechanism in this lesson.
Use the terms precisely
- production subsidy: A payment supporting eligible domestic production.
- world price: The price at which the product is available internationally under the stated model.
In the stated small-country case, price stays 10 and demand stays 100 boxes. Home supply rises from 40 to 50 with the subsidy. Imports fall from 60 to 50. The government pays 2 × 50 = 100 yuan. Producers receive 12 per box including the subsidy, while consumers pay 10. The policy supports home output without the tariff’s price rise under these assumptions.
The public payment uses tax revenue or borrowing and has an opportunity cost. Some payments support output that would have been produced anyway. World price availability, competition and unchanged demand are assumptions. An import quota, transport barrier or large-country price response could change the result. Do not conclude that a subsidy is costless because consumers’ price stays unchanged.
A per-unit production subsidy shifts home supply right by reducing the net cost of supplying each unit. With unrestricted imports at a fixed world price, buyers can still purchase at that price.