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💰 Subsidies as Trade Protection
Production subsidies
Production subsidy (trade).
- The domestic supply curve shifts right — domestic output increases.
- Unlike tariffs, the consumer price stays at the world price — consumers are not directly harmed.
- Imports fall as domestic firms capture a larger share of the market.
- The cost falls on taxpayers rather than consumers.
- Still creates a welfare loss (production inefficiency) — domestic firms produce at higher cost than world producers.
Export subsidies
An export subsidy pays domestic firms to export, making their goods cheaper abroad. This can lead to 'dumping' and often triggers retaliatory tariffs from trading partners.
Real-world controversy: The EU's Common Agricultural Policy (CAP) has been criticised for subsidising European farmers, enabling them to dump cheap agricultural products on developing country markets — undermining local farmers.
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⚖️ Comparing Protection Methods
| Feature | Tariff | Quota | Subsidy |
|---|---|---|---|
| Price effect | Rises | Rises | Stays at Pw |
| Domestic output | Increases | Increases | Increases |
| Imports | Fall | Capped | Fall |
| Government revenue | Yes (tariff revenue) | No (quota rent to licence holders) | No (costs government) |
| Consumer harm | Yes (higher price) | Yes (higher price) | No (price unchanged) |
| Taxpayer cost | No | No | Yes |
| Welfare loss | Two DWL triangles | Two DWL triangles | One DWL triangle |
Subsidies are often considered the 'least harmful' form of protection because they don't raise the consumer price. But they have an opportunity cost — the government money could be spent elsewhere.