Targeted and Global Export Subsidies and Welfare Impacts
A three-country model of export subsidies is developed with an exporter, an importer, and a third country, representing the rest of the world, that can act on either side of the market. The welfare effect of an export subsidy targeted toward one importing country is shown to depend on whether the third country is an exporter or an importer, the market shares, and demand elasticities. The possibility of the paradoxical result that the targeted country can lose welfare as a result of receiving a subsidy is demonstrated to exist, and conditions are derived that determine when this result occurs. It is also demonstrated that when the rest of the world is a net exporter, a country offering a targeted export subsidy will suffer a welfare loss, while either its export competitors or the targeted country gains, but not both simultaneously.
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