Question

2.) Suppose instead of taxing imports, the government were to subsidize them. Assume the world supply curve is horizontal at the world price for a particular imported good. Using a supply and demand graph for the importing country, show graphically and describe what would happen to welfare after the subsidy. (10 points)

Answer 1

Here the world supply curve is horizontal with same price for all the imports goods with different level of quantities. If the government gives subsides imposed, the welfare of domestic companies were increased. Import taxes try to protect the domestic firms and industries to develop their production and productivity. Price level p* S* D' YO Y1 Quantity With inelastic supply curve, the increasing level of subsidy will induce the production. This will leads to labour productivity and the consumption demand. Thus the demand for the commodity increased from YO to Y1. With stable supply the rise in demand will raise the welfare and it generate the employment level also. The rise in employment increases the wage rate and the people will get more amount of money for their consumption needs. This will raise their welfare. The rising individual welfare will lead to social welfare.