Impact of Export Subsidy on Demand, Supply, and Price - Assignment Example

The effects of subsidies on the economy are often separated into short-term and long-term effects. It is mostly argued that although in the short run these subsidies prove to be a quick remedy for lifting up weak industries and promoting their growth, in the long run, the same tool proves to be detrimental for industries who then become permanently dependant on the state for it.
This report attempts to analyze a particular form of subsidy known as an export subsidy in terms of its intended aims and its actual effects on the economic structure. The aim of this report is to analyze the economic impact of an export subsidy in an open economy (Australia in this case). The analysis shall begin with a thorough conceptual analysis of an export subsidy and its nature, followed by its effects on output and price as well as economic welfare and government budget. The report concludes with recommendations for government policy along with the potential limitations of this economic analysis.

2.0 Export Subsidies
Export subsidies have since long been used by governments as part of their policy to enhance the export of locally produced goods and dampen the sale of locally produced goods in the local market. It may take the form of loans extended at low cost or tax rebates/relief as well as government-backed expenditure on marketing activities such as advertising and product development (Carbaugh, 2010). In general, these are tools used by governments to enhance the export of specific products. They may be applied on an ad valorem or specific basis (Carbaugh, 2010). It is therefore common to see export subsidies particularly in agricultural products (including the dairy sector). Also, the export subsidy is an alternative to the provision of production subsidy to producers competing with imported goods in the domestic market. Simply put, the export subsidy is a motivation for local producers to increase their supply of exports as opposed to goods for domestic consumption (Carbaugh, 2010).
2.1 Impact of Export Subsidy on Demand, Supply, and Price
Considering that wine production is a part of the agricultural industry, export subsidies may be imposed by these in order to enhance their exports. Assuming that wine is a homogenous product and that it operates in a homogenous market, the analysis of the Australian government imposing export subsidies is simplified. An export subsidy will cause the domestic production to increase, thereby enhancing exports in turn (World Trade Organization, 2006). The domestic price of wine will rise provided that Australia simultaneously embarks on a policy of banning any re-imports. The greatest assumption here is that the Australian economy (the economy where export subsidy is imposed) is a price-taker (selling homogenous wine); hence, the resulting outcome will not have any influence on the world price of wine.