New Zealand is a price taker: it is too small to change the world price (Pw), so it can buy or sell as much as it likes at Pw. The market is the one on the Tariff and Quota simulators: demand Q = 100 − P, domestic supply Q = P − 10 (no trade: $55, 45 units). The numbers are illustrative.
A subsidy is a payment from the government to producers: here, $s for each unit.
- Import-competing industry (Pw below $55: New Zealand imports). A subsidy on all output lowers firms' costs, so supply shifts down by s (S → S + subsidy). At the world price firms now make Q2 instead of Q1, so imports fall by the same amount. Consumers still pay Pw and buy the same quantity.
- Exporting industry (Pw above $55: New Zealand exports). A subsidy on all output shifts supply the same way: output and exports rise, and the price here stays at Pw. An export subsidy (paid only on units sold overseas) is different: firms won't sell at home for less than an export earns, so the price here rises to Pw + s, consumers buy less, and exports rise by more.
- Areas. On all output: producers gain A, the government pays A + B (s × Q2, hatched), and B is the deadweight loss (units made here at a cost above the world price). On exports only: consumers lose A + D, producers gain A + C + D, the government pays B + C + D (s × exports), and B + D is lost.
- The balance on goods (current account) improves either way: less is spent on imports, or more is earned from exports.
Compare puts a tariff, a quota and a subsidy side by side, set to give domestic firms the same output. A tariff and a quota raise the price, so consumers pay; the tariff's revenue goes to the government and the quota's rent to licence holders. A subsidy keeps the price at Pw, so taxpayers pay, and its deadweight loss is smaller (no consumption loss), but it costs the government money instead of raising it.
How to use it. Choose the industry (or Compare) in the title bar. Pick a preset or move the sliders. The table gives each group's gain or loss in dollars, and the list explains the effect on each group, the way an NCEA answer should.
Common exam mistakes
- Shifting supply left, or shifting the world price, for a subsidy. A subsidy lowers costs: domestic supply shifts right (down), and a price taker's world price doesn't move.
- Saying consumers pay less. With a subsidy on all output the price stays at the world price: consumers pay the same. (With an export subsidy they pay more.)
- Forgetting who pays: a subsidy is paid by taxpayers, and has an opportunity cost.
- Describing the change without referring to the graph: name the curves and the quantities (S to S1, Q1 to Q2, imports fall from … to …).
New Zealand removed almost all of its farm subsidies in the mid-1980s, and the World Trade Organization's members agreed in 2015 to end farm export subsidies, so most of the subsidies New Zealand exporters meet are other countries'.
Objective: NCEA Level 2 Economics 91223 — analyse international trade using the price-taker model: explain in detail how a subsidy changes domestic output, imports or exports and the balance on goods, and compare its impact on different groups in New Zealand society with a tariff's and a quota's.
Where this fits
- AP: AP Microeconomics Goes beyond AP Microeconomics: AP's trade policy covers tariffs and quotas; subsidies in a traded market go beyond it.
- AQA: AQA A Level Economics (7136)
- Cambridge: Cambridge IGCSE Economics (0455); Cambridge A Level Economics (9708); Cambridge AS Level Economics (9708) Goes beyond Cambridge IGCSE Economics (0455): 0455 has no diagrams of protection; the price-taker diagram, welfare areas and tariff/quota comparison go beyond it.
- IB: IB Economics HL; IB Economics SL
- NCEA Level 2 Economics: 91223 Analyse international trade using economic concepts and models; 91227 Analyse how government policies and contemporary economic issues interact Goes beyond 91223: Subsidies aren't named in 91223; the page uses its price-taker model and links them to output, exports or imports and the balance on goods.
- NCEA Level 3 Economics: 91399 Demonstrate understanding of the efficiency of market equilibrium
- Pearson Edexcel International: Edexcel International GCSE Economics (4EC1); Edexcel International A Level Economics Goes beyond Edexcel International GCSE Economics (4EC1): Consumer and producer surplus and deadweight loss aren't in 4EC1.
