KEY POINTS

1. An export subsidy leads to a fall in welfare for a small exporting country facing a fixed world price. The drop in welfare is a deadweight loss and is composed of a consumption and production loss, similar to an import tariff for a small country.
2. In the large-country case, an export subsidy lowers the price of that product in the rest of the world. The decrease in the export price is a terms-of-trade loss for the exporting country. Therefore, the welfare of the exporters decreases because of both the deadweight loss of the subsidy and the terms-of-trade loss. This is in contrast to the effects of an import tariff in the large-country case, which generates a terms-of-trade gain for the importing country.
3. Export subsidies applied by a large country create a benefit for importing countries in the rest of the world, by lowering their import prices. Therefore, the removal of these subsidy programs has an adverse affect on those countries. In fact, many of the poorest countries are net food importers that will face higher prices as agricultural subsidies in the European Union and the United States are removed.
4. Production subsidies to domestic producers also have the effect of increasing domestic production. However, consumers are unaffected by these subsidies. As a result, the deadweight loss of a production subsidy is less than that for an equal export subsidy, and the terms-of-trade loss is also smaller.
5. Export tariffs applied by a large country create a terms-of-trade gain for these countries, by raising the price of their export product. In addition, the export tariff creates a deadweight loss. If the terms-of-trade gain exceeds the deadweight loss, then the exporting countries gain overall.
6. It is common for countries to provide subsidies to their high-technology industries because governments believe that these subsidies can create a strategic advantage for their firms in international markets. Because these industries often have only a few global competitors, we use game theory (the study of strategic interactions) to determine how firms make their decisions under imperfect competition.
7. A Nash equilibrium is a situation in which each player is making the best response to the action of the other player. In a game with multiple Nash equilibria, the outcome can depend on an external factor, such as the ability of one player to make the first move.
8. Export subsidies can affect the Nash equilibrium of a game by altering the profits of the firms. If a subsidy increases the profits to a firm by more than the subsidy cost, then it is worthwhile for a government to undertake the subsidy. As we have seen, though, subsidies are not always worthwhile unless they can induce the competing firm to exit the market altogether, which may not occur.