Cambridge Notes, Past Papers, Revision Questions

IGCSE Economics – Globalisation and Trade Restrictions: Subsidies

International Trade and Globalisation

Globalisation and Trade Restrictions

Globalisation increases the flow of goods, services, capital and labour across borders. While it can raise living standards, governments may intervene in international trade to protect domestic industries, preserve jobs, or achieve other policy objectives. These interventions are known as trade restrictions.

Methods of Protection

The main methods used to protect domestic producers are:

Tariffs (import duties)

Quotas (quantitative limits)

Import licences

Export subsidies

Domestic subsidies

Anti‑dumping duties

Subsidies

A subsidy is a financial contribution made by the government to a firm, industry or individual that reduces the cost of producing a good or service, or raises the price received for it. By lowering the effective marginal cost, a subsidy encourages higher output and can make domestic goods more competitive in international markets.

Types of Subsidies

Production subsidies – payments per unit produced (e.g., per tonne of wheat).

Export subsidies – payments made only when the good is exported, allowing exporters to sell at lower world prices.

Input subsidies – reductions in the price of a factor of production, such as fuel, electricity or raw materials.

Price‑support subsidies – the government guarantees a minimum price for a product, buying excess supply if necessary.

Tax rebates or credits – reductions in tax payable for firms that meet certain criteria (e.g., research & development).

Economic Effects of Subsidies

Subsidies alter the supply curve faced by domestic producers. A production subsidy shifts the supply curve downwards (or to the right) by the amount of the subsidy per unit, reducing the market price paid by consumers and increasing the quantity supplied.

The welfare impacts can be summarised as follows:

Consumer surplus increases because the price falls.

Producer surplus increases because producers receive the market price plus the subsidy.

The government incurs a cost equal to the subsidy amount multiplied by the quantity produced.

There is a dead‑weight loss due to over‑production relative to the free‑market equilibrium.

Suggested diagram: Supply‑demand diagram showing the effect of a production subsidy on domestic price, quantity and welfare. The original supply curve (S) shifts to S′ (downward by the subsidy amount). Highlight changes in consumer surplus (CS), producer surplus (PS), government expenditure (GE) and dead‑weight loss (DWL).

Calculating the Cost of a Production Subsidy

If a government pays a subsidy of \$s\$ per unit and the subsidised quantity produced is \$Q_s\$, the total fiscal cost is:

\$\text{Government Expenditure} = s \times Q_s\$

Example: A wheat subsidy of $20 per tonne is granted. After the subsidy, domestic production rises from 1 000 tonnes to 1 300 tonnes.

\$\text{Cost} = 20 \times 1\,300 = \\$26\,000\$\$

Comparison of Subsidy Types

Type	Who Receives It?	Primary Objective	Typical Example	Potential Drawbacks
Production subsidy	Domestic producers	Increase output & domestic supply	$/tonne for wheat	Over‑production, fiscal burden, trade disputes
Export subsidy	Exporting firms	Make exports cheaper abroad	Aircraft manufacturers receive $ per aircraft	Retaliation, WTO violations, distortion of world prices
Input subsidy	Firms using the subsidised input	Reduce production costs	Fuel tax rebate for transport companies	Encourages use of subsidised inputs, may harm environment
Price‑support subsidy	Producers of the supported good	Stabilise farmer incomes	Minimum price for milk, with government buying surplus	Government stockpiles, market distortion, higher consumer prices
Tax rebate/credit	Firms meeting policy criteria	Encourage specific activities (e.g., R&D)	R&D tax credit for technology firms	Complex administration, may favour larger firms

Key Points for Revision

Subsidies lower the effective cost of production, shifting supply outward.

They increase consumer and producer surplus but create a fiscal cost for the government.

Over‑production leads to a dead‑weight loss – a loss of total welfare.

Internationally, subsidies can trigger disputes under World Trade Organization (WTO) rules.

When answering exam questions, always discuss both the short‑run effects (price, quantity) and the longer‑run welfare implications (government cost, dead‑weight loss, possible retaliation).

Types of trade restrictions / methods of protection: subsidies