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Chapter 34: Q.2 (page 831)

Explain how a subsidy on agricultural goods like sugar adversely affects the income of foreign producers of imported sugar

Short Answer

Expert verified

By reducing the cost for domestic producers, it decreases the domestic price of sugar.

Step by step solution

01

Step 1. Introduction

A subsidy is payment provided by the government to a business or institution as a form of assistance.

02

Step 2. Explanation 

If the government provides a subsidy to sugar producers, it would reduce the cost of production for them. As a result, their supply curve would move to the right. This rightward shift in the supply curve would cause the price level to fall.

Foreign producers of sugar would have to compete with lower prices. If the subsidies are large enough, the price level may fall below their cost of production causing even more loss to them.

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