Study Notes
Protectionism - Export Subsidies
- Level:
- AS, A-Level, IB
- Board:
- AQA, Edexcel, OCR, IB, Eduqas, WJEC
Last updated 4 Jul 2018
Export subsidies are a form of protectionism
Revision Video: Ten Examples of Non-Tariff Barriers (including domestic subsidies)
Domestic subsidies
What is a domestic subsidy?
- A domestic subsidy is any form of government financial help to domestic businesses
- The subsidy helps firms to lower their costs and thus become more competitive in home and overseas markets
Impact of domestic subsidies
Domestic producers
- Domestic producers gain from the subsidy – they get the world price + a subsidy
- Higher revenues will lift profits and might therefore lead to a higher share price. Increased output creates the possibility of economies of scale
- Evaluation: Risk of a dependency culture emerging – i.e. businesses relying on the subsidies rather than taking their own steps to become more competitive by increasing productivity, eliminating inefficiency and accelerating the pace of process/product innovation
Consumers
- Assuming that the subsidy is not large enough to change the world price, not direct effect on the prices that consumers pay for their products
- They may face higher taxes if expensive subsidies take up a high percentage of government spending
Government
- Subsidy can be an effective non-tariff barrier to reduce the volume of imports by encouraging domestic production
- Unlike a tariff, a subsidy does not generate tax revenues directly.
- Increased spending on subsidies may cause a growing budget deficit
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