IBonomicsProduction Subsidy Diagram – Protectionism
This diagram illustrates the effects of a production subsidy, where the government supports domestic producers to lower their costs and increase output. It is a form of protectionism without raising consumer prices directly.
dd
Dd: Domestic demand for the good.
sd
Sd: Original domestic supply curve.
ss
Ss: New domestic supply curve after subsidy, showing increased output.
pw
Pw: World price of the good, unchanged by the subsidy.
pq
Pq: Hypothetical higher price without subsidy, not realized here.
q1
Q1: Domestic output under free trade.
q3
Q3: Domestic output after subsidy.
q2
Q2: Total quantity demanded at world price.
welfare loss
Welfare Loss: Grey area showing inefficiencies from producing beyond the comparative advantage level with government support.
Under free trade, domestic producers supply Q1, and the remaining demand is fulfilled through imports (Q2 - Q1) at the world price Pw.
A production subsidy shifts the domestic supply curve from Sd to Ss, reducing production costs and allowing domestic firms to expand output from Q1 to Q3.
Imports fall from (Q2 - Q1) to (Q2 - Q3) as domestic output replaces part of the imported quantity.
The domestic price remains at Pw, so consumers are unaffected directly; however, the government must fund the subsidy.
A welfare loss arises due to inefficient allocation of resources, as subsidy-induced domestic production exceeds the efficient free trade level.
More Global Economics Diagrams
Explore other diagrams from the same unit to deepen your understanding
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This diagram shows how an export subsidy raises the domestic price above the world price, encouraging producers to export more while reducing consumer welfare and creating deadweight losses.
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