<4.2.3 SUBSIDIES>

--DEFINITION--

PRODUCTION SUBSIDIES are PAYMENTS GRANTED BY THE GOVERNMENT PER UNIT OF OUTPUT SOLD DOMESTICALLY which allows them TO LOWER THEIR UNIT COST so they are MORE COMPETITIVE when COMPETING with IMPORTS within the DOMESTIC MARKET.

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These types of subsidies are NOT TO BE CONFUSED WITH EXPORT SUBSIDES, which are PAYMENTS PER UNIT OF OUTPUT granted by the government to domestic EXPORTING firms TO ALLOW THEM TO LOWER THEIR UNIT COSTS so that their EXPORTS ARE MORE COMPETITIVE when COMPETING ON THE WORLD STAGE.
These types of subsidies are deemed ILLEGAL UNDER WTO REGULATIONS as they are considered ANTI-COMPETITIVE and go against the WTO's objective of full 'Trade-liberalisation'.

--THINK AHEAD & SKETCH!--

"Use your knowledge of subsidies from unit 2.7, to anticipate the impact of a production subsidy as a protectionist tool.", "How could a subsidy 'protect' domestic producers?"

--MARKET EFFECTS--

--THINK AHEAD & SKETCH!--

"We know from the model that the subsidy increases domestic output, so that the shortage is reduced, but what would happen if the subsidy was so large that domestic output actually created a 'surplus'?"

--WELFARE EFFECTS--

--WINNERS & LOSERS--

-WHY SUBSIDIES ARE PREFERRED-

The EFFECTS of PRODUCTION SUBSIDIES ARE NOT AS HARMFUL AS those of TARIFFS and QUOTAS, because while they all encourage inefficient domestic production, ONLY SUBSIDIES HAVE NO NEGATIVE EFFECT ON CONSUMPTION (NO LOSS OF CONSUMER SURPLUS).

--EXPORT SUBSIDY--

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