Types of trade restrictions / methods of protection: subsidies

International Trade and Globalisation – Globalisation and Trade Restrictions

Subsidies: A Type of Trade Protection

Imagine a student who wants to study abroad but can't afford the tuition. A scholarship (subsidy) helps cover the cost, making the study more affordable. In international trade, governments give subsidies to domestic firms or producers to lower their costs, making their goods cheaper for consumers or more competitive abroad. 🌍💰

Types of Subsidies

  • Production subsidies – money given to producers for each unit made.

  • Export subsidies – extra payment for each unit exported.

  • Import substitution subsidies – support for domestic goods that replace imports.

  • Research & Development subsidies – funding for innovation that can lead to cheaper production.

How Subsidies Work (Math)

Let p be the market price, c the production cost, and s the subsidy per unit.

The effective cost to the producer becomes:



\$c_{\text{eff}} = c - s\$



If the subsidy is large enough, the producer can sell at a lower price p' = p - s, attracting more buyers and increasing quantity demanded.

Supply and Demand Impact

EffectSupplyDemand
Subsidy given to producersShifts right (↑ supply)Price falls, quantity demanded rises
Export subsidyIncreases export supplyDomestic price may rise due to higher production

Real‑World Example

The UK has historically subsidised its dairy industry. Farmers receive a payment per litre of milk produced. This keeps dairy prices low for consumers and ensures UK dairy can compete with cheaper imports from countries like the EU. 🐄🏭

Exam Tip: When answering “Explain how subsidies can affect a domestic industry,” remember to:

  1. Define what a subsidy is.

  2. Show the effect on supply (shift right) and price (fall).

  3. Discuss the impact on consumers (lower price, higher quantity).

  4. Mention any possible negative effects (e.g., trade disputes, inefficiency).

Use the word “subsidy” and the symbol \$s\$ to demonstrate your understanding of the economic model. 📚

Quick Quiz

1️⃣ What happens to the market price of a good if the government provides a subsidy to its producers?

2️⃣ Give one advantage and one disadvantage of export subsidies.

3️⃣ How can subsidies lead to trade disputes?

Answer these in a short paragraph for each question. 📝