Answer to Question #204573 in Finance for Asanda Sibeko

Question

Provide a detailed discussion of the possible welfare effects, if the South African Government decides to subsidize Ceres farmers exports to the United Kingdom. 

Answer 1

Solution:

Some of the welfare effects if the South African Government decides to subsidize Ceres farmers exports to the United Kingdom, includes the following:

1.). Consumers of the product in South Africa will experience a decrease in well-being as a result of the export subsidy. Due to the increase in their domestic price, the amount of consumer surplus in the market will be lowered.

2.). Ceres farmers in South Africa will experience an increase in their well-being due to the subsidy. The increase in their product prices in their own market prices will raise producer surplus in the industry. It will also result in output increase, employment increase, and increase in profit and payments.

3.). The South African government will have to pay for the subsidy to exporters. These payments must be issued out of the general government budget. It may result to budget cuts to other government programs or increase in tax revenues which will hurt the consumers more.

 

4.). The export subsidy will result in a reduction in national welfare for South Africa since all three components, that is terms of trade effect, consumption distortion and production distortion will all be negative.