IB Economics SL & HLTopic 4 — The Global EconomyPaper 1, 2 & 3Core skill~9 min read
Export Subsidies
Tariffs and quotas attack imports. A subsidy works from the other end: it makes domestic firms cheaper so they can beat the imports on their own. Consumers are not the ones paying this time — taxpayers are, and that changes the whole evaluation.
📚 What you need to know
A subsidy is a payment from the government to producers that lowers their costs per unit.
Lower costs mean domestic firms supply more at every price, so the domestic supply curve shifts right.
Domestic output rises, so imports fall — and if firms can supply more than the home market wants, the surplus can be exported.
The domestic price does not change when the country is a price taker at the world price.
Consumers therefore gain nothing extra: they were already paying the low world price.
The subsidy is paid for by taxpayers, so there is an opportunity cost — that money could have gone to health or education.
Foreign producers, often in developing countries, lose market share to firms that are not actually cheaper, only subsidised.
The subsidy diagram
Everything starts from the free trade position again. The subsidy shifts domestic supply right, so domestic firms now supply more at the same world price, and imports shrink to whatever is left of domestic demand.
The two supply curves are parallel and the gap between them measures the subsidy per unit.
Watch the price line. In an international subsidy diagram the domestic price stays at the world price. If you find yourself drawing a new equilibrium price, you have slipped back into a closed-economy diagram.
Who gains and who pays
Consumers are the group students always want to put in the winners column here. Check the price line before you do.
The strongest evaluation on export subsidies looks outward. Rich countries can afford large, permanent subsidies; producers in poorer countries cannot compete with a rival whose government is paying part of its costs, and whole industries have shrunk as a result.
Worked examples
WORKED EXAMPLE
The cost of the subsidy and the change in imports
The world price of a crop is $12 per kg. At that price domestic firms supply 20m kg and domestic consumers demand 90m kg. The government introduces a subsidy of $6 per kg, after which domestic firms supply 50m kg. Calculate (a) the cost of the subsidy to the government and (b) the change in imports. [4]
(a) Cost = subsidy per unit × subsidised output= $6 × 50m$300 million(b) Imports before90m − 20m = 70m kgImports after90m − 50m = 40m kgimports fall by 30 million kgDemand is unchanged at 90m because consumers still pay the world price of $12.
WORKED EXAMPLE
The change in domestic producer revenue
Using the same figures, calculate the change in domestic producer revenue as a result of the subsidy. [2]
Step 1: revenue before$12 × 20m = $240 millionStep 2: revenue after
Producers receive the world price plus the subsidy: $12 + $6 = $18
$18 × 50m = $900 millionStep 3: difference$900m − $240man increase of $660 millionThe commonest slip here is using $12 for the revenue after. Producers get the subsidy on every unit they sell.
💡 Exam tip
Shift domestic supply right, not down and along. Keep the two curves parallel and label both.
Keep the price at Pw. The world price line does not move.
Producers receive price plus subsidy; consumers pay the price only. Use the right one in each calculation.
Cost to the government = subsidy × the subsidised quantity, which is the higher domestic output.
Mention opportunity cost by name when evaluating. It is the cleanest criticism available.
Ask how long the subsidy has run. A large, long-standing subsidy can turn an industry into a global heavyweight that no unsubsidised rival can enter.
⚠ Common mix-up
Saying consumers benefit from lower prices. They were already paying the world price before the subsidy.
Using the old output to calculate the government’s bill instead of the new, higher one.
Forgetting the subsidy when working out producer revenue.
Shifting demand. A production subsidy affects supply only.
Presenting a subsidy as costless protection. The cost is real; it just sits in the budget.
Ignoring the effect on producers abroad, which is where most of the evaluation marks are.
Up next: Administrative Barriers — the quiet form of protection that never appears as a tax or a limit, and is far harder for a trading partner to complain about.
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