For the following 5 questions (3 points each; 15 points total). The diagram below depicts one country imposing a per unit export subsidy on its exports to the other country, based on an initial free trade position. Please correctly identify the following welfare changes that occur as a result of the imposition of the export subsidy:

The change in welfare due to the fiscal cost of the export subsidy to the country imposing it:

Question

For the following 5 questions (3 points each; 15 points total). The diagram below depicts one country imposing a per unit export subsidy on its exports to the other country, based on an initial free trade position.  Please correctly identify the following welfare changes that occur as a result of the imposition of the export subsidy:

The change in welfare due to the fiscal cost of the export subsidy to the country imposing it:

BlackTom AI · Accepted Answer

Restating the question and options to set the stage:
- Question: For the welfare changes arising from a per-unit export subsidy imposed by one country on its exports (relative to the initial free-trade position), identify the change in welfare due to the fiscal cost of the export subsidy borne by the country imposing it.
- Answer options:
  1) + (a + b + c) + (e + f + g)
  2) + (b + c + d) + (f + g + h)
  3) ‒ (b + c + d) ‒ (f + g + h)
  4) ‒ (a + b + c + d) ‒ (e + f + g + h)
  5) ‒ (a + b + c) ‒ (e + f + g)

Option-by-option analysis:
- Option 1: + (a + b + c) + (e + f + g)
  This option assigns a positive welfare change to the fiscal cost terms. Since a subsidy is a government expenditure, the fiscal cost should reduce welfare (a negative change) rather than increase it. Therefore this option misrepresents the sign of the fiscal cost and is incorrect.
- Option 2: + (b + c + d) + (f + g + h)
  Here the terms (b + c + d) and (f + g + h) are both added positively. If these terms correspond to subsidy payments or related fiscal outlays, their effect should reduce welfare (negative) for the subsidizing country, not increase it. Thus the positive sign makes this option inconsistent with the fiscal cost being a welfare loss, so it is incorrect.
- Option 3: ‒ (b + c + d) ‒ (f + g + h)
  This option assigns a negative welfare change equal to the sum of the relevant fiscal-outlay areas (b, c, d, f, g, h). Since the export subsidy creates a cost to the government, the net welfare effect from the subsidy’s fiscal cost should be a subtraction of those areas. Therefore, the negative sign and the identified sets (b, c, d, f, g, h) align with a welfare loss due to the subsidy’s fiscal cost. This option is consistent with the fiscal burden interpretation.
- Option 4: ‒ (a + b + c + d) ‒ (e + f + g + h)
  This option combines a larger set of areas (a, b, c, d, e, f, g, h) into the negative welfare change. If the fiscal cost is specifically the payments related to the subsidy, the inclusion of extra areas (a and e, for example) may be incorrect or double-counting and does not isolate the pure fiscal cost impact. This makes the option unlikely to be correct for the stated question.
- Option 5: ‒ (a + b + c) ‒ (e + f + g)
  This option uses a subset of areas (a, b, c, e, f, g) and omits others (like d, h) that are typically involved in the subsidy-related fiscal cost in standard diagrams. If the fiscal cost encompasses all subsidy-related payments across relevant panels, omitting those areas would misstate the total fiscal burden. Therefore this option is also implausible as the precise accounting of the fiscal cost.

Synthesis of the reasoning:
- Among the options, the correct characterization of the welfare change due to the fiscal cost of an export subsidy is a negative sum of the relevant subsidy-outlay areas, reflecting a welfare loss to the country imposing the subsidy. This aligns with Option 3, which states ‒ (b + c + d) ‒ (f + g + h).
- The other options either assign a positive sign to expense-related areas (which contradicts the fiscal-cost welfare loss), or mix in additional areas (a, e, etc.) that are not cleanly tied to the fiscal burden, or omit relevant subsidy-outlay components, leading to an incorrect tally of the welfare change.

Notes on potential diagram mapping:
- In standard export-subsidy diagrams, the welfare loss from the fiscal cost is depicted as the negative welfare impact from government expenditures on subsidies. The letters b, c, d, f, g, h typically denote the relevant subsidy-payment areas in the respective panels. The negative sign indicates a reduction in welfare due to these budgetary costs.
- The exact interpretation of each letter depends on the diagram’s labeling, but the essential idea is that the subsidy creates a fiscal outlay that lowers welfare, and summing those outlays with a negative sign captures the correct welfare change due to the fiscal cost.

Overall assessment:
- The option that matches the welfare loss from the subsidy’s fiscal cost in the standard labeling is Option 3: ‒ (b + c + d) ‒ (f + g + h).

AEM2300/ECON2300 Prelim 2 (April 18th, 7:30 PM - 9:30 PM)

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