IB Economics SLTopic 4 — The Global EconomyPaper 2Diagram skill~9 min read
Subsidies and Administrative Barriers
A tariff is obvious. A subsidy and a rule about jar sizes are not, and that is the point of them. Both cut imports without ever raising the price on the shelf, so consumers do not notice and trading partners find them harder to complain about.
📘 What you need to know
A production subsidy is a payment to domestic firms that lowers their costs, shifting the domestic supply curve to the right.
Domestic output rises and imports fall, without the world price changing.
Because the country still pays the world price, consumers are no better and no worse off.
The cost is paid by taxpayers: subsidy per unit × the quantity domestic firms now produce. That money has an opportunity cost.
Part of that spending becomes producer surplus; the rest is a welfare loss, because less efficient home firms replace cheaper imports.
An export subsidy goes further: it lets firms undercut foreign rivals in their own markets.
Administrative barriers are rules rather than taxes — safety limits, product specifications, environmental standards, labelling, slow paperwork — and they protect quietly.
The subsidy diagram
Start again from free trade at $20 with 40,000 tonnes produced at home and 80,000 imported. Now the government pays domestic growers $5 for every tonne they produce. Their costs fall, so at any price they will supply more, and the domestic supply curve shifts down and to the right.
A is the gain in producer surplus, worth $250,000. B is the welfare loss of $50,000, because those extra tonnes cost more to grow at home than they would have cost to import.
WORKED EXAMPLE
Calculate the cost of the subsidy to the government and the change in the quantity of imports. [4]
Step 1: how much the subsidy is paid on
Domestic output with the subsidy is 60,000 tonnes, and every tonne is paid $5.
$5 × 60,000 = $300,000Step 2: imports before120,000 − 40,000 = 80,000 tonnesStep 3: imports after120,000 − 60,000 = 60,000 tonnesCost $300,000; imports fall by 20,000 tonnesDemand stays at 120,000 because the price consumers pay has not changed. Only the split between home and abroad has.
WORKED EXAMPLE
Calculate the change in domestic producer revenue as a result of the subsidy. [2]
Step 1: revenue before$20 × 40,000 = $800,000Step 2: revenue after, at the price they actually receive
They get $20 from the buyer plus $5 from the government on each tonne.
$25 × 60,000 = $1,500,000Step 3: the change$1,500,000 − $800,000 = $700,000Producer revenue rises by $700,000Use $25, not $20. The producer’s price and the consumer’s price are different once a subsidy exists.
Compare the three tools on the same market. The tariff cost consumers $100,000 extra and raised $200,000 for the government. The subsidy costs consumers nothing but costs taxpayers $300,000. Neither is free; the bill just arrives at a different address.
Export subsidies and why they cause arguments
An export subsidy pushes the same idea outward. With costs cut, domestic firms can sell abroad below what foreign producers can match, so the protected industry takes market share in other countries. Two things follow. Rich countries can afford large, long-running subsidies and poorer ones usually cannot, so the playing field tilts. And producers in the importing country face competition from a rival being paid by its government, which is why export subsidies are one of the most disputed areas in world trade.
Administrative barriers: protection without a price tag
These are rules, not taxes. Some are perfectly genuine measures to protect health or the environment, and some exist mainly to make importing difficult. The awkward part for governments and examiners alike is that you often cannot tell which is which from the outside.
Because they are written as regulation rather than trade policy, administrative barriers are harder to challenge and harder to count than a tariff rate.
The four tools side by side
Tool
Price consumers pay
Effect on the budget
Main winner
Tariff
Rises
Revenue comes in
Domestic producers and the government
Quota
Rises
No revenue
Domestic producers and licence holders
Production subsidy
Unchanged
Money goes out
Domestic producers
Administrative barrier
Rises if supply is squeezed
Little direct effect
Domestic producers, and sometimes public safety
The politically attractive option. A subsidy hides the cost in the budget rather than on the price label, so voters feel nothing at the till. That is exactly why economists insist on naming the opportunity cost: the same money could have gone to schools, hospitals or retraining.
💡 Exam tip
Shift the supply curve for a subsidy, do not draw a new price line. The world price stays put.
Multiply the subsidy by domestic output, not by total consumption. Imports are not subsidised.
Remember producers and consumers face different prices once a subsidy exists, so revenue uses the higher one.
Always name the opportunity cost of subsidy spending. It is a guaranteed evaluation point.
For administrative barriers, argue both ways. A safety rule can be genuine and protectionist at the same time.
Use the same market for all your practice. Once these numbers are familiar, you will spot a misread diagram instantly.
⚠️ Common mix-up
Saying consumers gain from a production subsidy. At the world price they pay exactly what they paid before.
Calculating the subsidy cost using total demand. It is paid only on what home firms produce.
Confusing a production subsidy with an export subsidy. One replaces imports, the other pushes goods abroad.
Treating the whole subsidy as a loss. Most of it is a transfer to producers; only the triangle disappears.
Assuming every regulation is disguised protectionism. Some standards exist for good reasons and would survive any trade dispute.
Forgetting the taxpayer. Subsidy questions are about three groups, and the third one is easy to leave out.
Up next: The Case for Trade Protection — the arguments governments actually use, and how to judge which ones hold up.
Want this explained one-to-one?
Book a free session with an experienced IB Economics tutor and get your trickiest topics made simple.
