Chapter 10: Export Policies in Resource and High Technology Industries

Nash equilibrium

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.

Export Subsidy

An export subsidy leads to a fall in welfare for a small exporting country facing fixed world price. The drop in welfare is a DWL. In a large country case, an export subsidy lowers the price of the product in the rest of the world. The decrease in the export price is a TOT loss for the exporting country. Therefore, the welfare of the exporters decreases because of both the DWL of the subsidy and the TOT loss. In contrast, an import tariff generates a TOT gain for the importing county. 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 subsidies has an adverse affect on those countries. Many of the poorest countries are net-importers who will face higher prices as agricultural subsidies in the EU and US are removed.

Impact of an export subsidy on a small Home country

Domestic exporters receive world price plus the subsidy, importer abroad pay the world price. loss in consumer surplus= - (a+b) rise in producer surplus= + (a+b+c) fall in government revenue= - (b+c+d) net effect on home welfare= - (b+d) (b+d)= DWL d=production loss b= consumption loss

Export subsidies and Nash Equilibrium

Export subsidies can affect the Nash equilibria of a game by altering the profits of the firm. If a subsidy increases the profits to a firm by more than the subsidy cost, than it is worthwhile for a government to undertake the subsidy. Subsidies aren't always worthwhile unless they can induce the competing firm to exit the market altogether, which may not occur.

Export Tariff

Export tariffs applied by a large country create a TOT gain for these countries, by raising the price of their export product. The export tariff creates a DWL; if the TOT gain exceeds DWL then the exporting countries gain overall

Effect of a production subsidy in a small Home country

Home Welfare: change in consumer surplus= none (demand isn't affected) rise in producer surplus= + (a+b) fall in government revenue= - (a+b+c) net effect on home welfare= - c DWL=c, exports rise but by less than for an export subsidy because quantity demanded at Home doesn't change

Effect of an export subsidy on a large Home country

Home Welfare: loss in consumer surplus= - (a+b) rise in producer surplus= + (a+b+c) fall in government revenue= - (b+c+d+e) net effect on home welfare= - (b+d+e) Foreign and World Welfare: TOT gain for foreign country= e* DWL for the world= (b+d+f)

Subsidies for high-tech industries

It is common for countries to provide subsidies to their high-tech 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 to determine how firms make their decisions under imperfect competition.

Production subsidy

The government provides a subsidy of s dollars for every unit a Home firm produces. The government might guarantee a minimum price to a farmer and make up the difference or they might provide subsidies to the users of the crop to purchase it, thus increasing demand and raising market price. Production subsidies to domestic producers also have the effect of increasing domestic production. However, consumers are unaffected by these subsidies. As a result, the DWL of a production subsidy is less than that for an equal export subsidy and TOT loss is also smaller.

Effect of a production subsidy

The rise in the quantity of exports due to the production subsidy is less than the increase in quantity of exports for the export subsidy. With the export subsidy, the price for Home consumers and producers rose to the world price plus s, so exports increased because of a rise in quantity supplied and a drop in quantity demanded

Impact of an export tariff on a small country

rise in consumer surplus= +a fall in producer surplus= - (a+b+c+d) rise in government revenue= +c net effect on home welfare= - (b+d)

Impact of an export tariff on a large country

rise in consumer surplus= +a loss in producer surplus= - (a+b+c+d) rise in government revenue= + (c+e) net effect on home welfare= +e - (b+d) (b+d)=DWL e=TOT gain If TOT gain exceeds DWL than Home gains overall from applying the tariff

Impact of an export quota on a large country

rise in consumer surplus= +a loss in producer surplus= - (a+b+c+d) rise in government revenue= 0 rents earned by producers= + (c+e) net effect on home welfare= +e - (b+d)