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A Reexamination of the Partial Competitive Equilibrium Analysis of Export Subsidies

Dunz, Karl (2006): A Reexamination of the Partial Competitive Equilibrium Analysis of Export Subsidies.

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Abstract

The conventional analysis of export subsidies implicitly assumes that foreign producers are prevented from selling their output in the nation with the export subsidy. This paper shows that there are 3 types of equilibria when there is no restriction on where firms can sell their output: the conventional one where the domestic price exceeds the world price by the amount of the subsidy, one where this difference is strictly positive but less than the amount of the subsidy, and one where these two prices are equal. A characterization of which type of equilibrium will occur for a given set of usual demand and supply curves is given. Furthermore, a simple demand and supply curve example is presented showing that it is possible that an export subsidy by a large country can increase that country's net welfare.

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