CA Foundation · Business Economics · International Trade
A government grants a per-unit subsidy to domestic producers of steel that compete with imports, instead of imposing an import tariff. Compared with a tariff giving the same domestic output, which statement is correct?
A subsidy keeps the consumer price at the world level, unlike a tariff, but the government has to finance it from its budget. A tariff raises domestic prices and earns revenue. A subsidy earns no import revenue and does not shrink domestic output.
- AThe subsidy raises the domestic price paid by consumers, just as a tariff does
- BThe subsidy avoids raising the consumer price but requires the government to spend revenueCorrect
- CThe subsidy earns the government tariff-like revenue from imports
- DThe subsidy reduces domestic output below the free-trade level
Explanation
A tariff raises the domestic price and earns revenue for the government, causing a consumption loss. A subsidy supports producers without raising the price consumers pay, but it is a fiscal cost to the government. Hence the subsidy does not raise consumer prices, while the budget bears the expense.
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