A subsidy given to domestic suppliers in order to reduce their cost of production and for them to pass that lower cost on via lower prices, which makes it easier for these producers to compete with worldwide firms and therefore to export their products more easily
Effect of a trade subsidy on the market
1. Shift the domestic supply curve downwards
2. Increase domestic supply
3. No change in domestic demand
4. Increase in effective price for domestic suppliers (world price plus subsidy)
5. No change in actual market price
Trade subsidy
Increases domestic supply but does not change market price
Trade subsidy
A very sneaky form of protectionism that is hard to prove
Increases domestic supply of inefficient producers
Leads to a deadweight welfare loss due to allocative inefficiency
Trade subsidy
May allow domestic firms to grow in size and exploit economies of scale (infant industry argument)
Reduces need for imports, potentially improving current account position
