Subsidy / Export Subsidy
Types of Trade Protection
Syllabus requirement
A financial payment by the government to domestic producers or exporters to encourage production and competitiveness.
Summary
This topic explains how subsidies are government payments to producers that lower firms' costs, encouraging greater output and helping domestic firms compete with foreign suppliers. In closed or domestic markets a subsidy shifts supply rightward, lowering consumer prices and raising quantity; in a small open economy with a fixed world price consumers keep paying the world price while domestic output rises and imports fall. Subsidies have distributional effects (helping producers, possibly hurting foreign competitors), impose a fiscal cost on the government, and can create resource misallocation and welfare losses if they prop up inefficient firms.
