An export subsidy raises the domestic price while lowering the foreign price in the case of a large country. Export subsidies enhance the volume of exports. The export subsidy will create a price differential equal to the subsidy value between the product's foreign and domestic prices.
Export Subsidy
Export subsidies are government policies that stimulate export of commodities while discouraging local sales of goods through direct payments, low-cost loans, tax breaks for exporters, or government-funded foreign advertising. Because an export subsidy lowers the price paid by overseas buyers, domestic consumers pay more than foreign consumers. Except for LDCs, the World Trade Organization (WTO) forbids most subsidies that are directly connected to the amount of exports. A country's government provides incentives to exporters in order to encourage the export of commodities.
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