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#IB FREE TRADES HOW TO#

Hence, what is left in the green are goes to no one – that is why Area 5 is said to be a DWL)

#IB FREE TRADES HOW TO#

(Be sure to know how to explain why is this the DWL! The green area is the size of the subsidy, everything in the green area apart from Area 5 goes to producers to increase their revenue. Deadweight welfare loss: due to increased production by the inefficient domestic producers (over allocation of resources to those producers), Deadweight Welfare Loss (DWL) marked triangle Area 5 emerges.Foreign Producers: their revenue decreases from (Area 2 + Area 3 + Area 4) to (Area 3 + Area 4) as rice imports shrank.Their revenue increase from (Area 1 + Area 2) to (Area 1 + Area 2 + green-marked area). Domestic Producers: the price that they receive increases to Pw+subsidy.

Consumers: loss of the consumer surplus does not occur, as the price of the rice does not change.

(To evaluate: could this money be used in a more effective way?) For IB Economics HL students – Size of the subsidy mathematically: Q2 (quantity produced by domestic producers) * subsidy size To put it in another way: tax-payers’ money is used to subsidize inefficient producers.

Government: Japan’s government is paying the subsidy of the green-marked area.

Domestic production increases Q1 → Q2 and the quantity imported shrinks to Q4-Q2.Įffect of the subsidy on different stakeholders: When the Japan government starts subsidizing its producers, the domestic supply curve shifts downwards by the size of the subsidy per unit: ( Pw + subsidy – Pw). At this price, domestic producers supply Q1 and the imports are Q4-Q1. When the trade takes place without protectionism, the equilibrium is at the intersection of S world with D at the quantity Q4 and price Pw. The diagram above illustrates the market for rice in Japan under international trade. In the international trade context, the subsidy is given to domestic producers to increase their international competitiveness.

Subsidy – government payment to producers attempting to lower the price of produce and increase quantity produced (encourage production).