Suppose Home is a small country trading with a large exporter. The supply and demand curve for Home is illustrated by the following figure, where P^w denotes the free-trade world price. Assume that the Foreign government supports its producer with an export subsidy that lowers the world price to P^*.

Should Home consider levying a countervailing duty that would raise the import price back to P^w (i.e., the level without the subsidy)? Answer by ranking the following situations. Be sure to justify your ranking.

      (1)  Home without the Foreign export subsidy

      (2)  Home with the Foreign export subsidy

      (3)  Home with the Foreign export subsidy and the countervailing duty

Transcribed Image Text:

Home Price PW P* D a B C S₂ S₁ d D₁ D₂ S Quantity