US and Canada are two large countries in a cotton market. Assume that demand and supply curves are linear in both countries. With free trade the US exports 50 bales of cotton to Canada at a price of $400/bale. Under pressure from cotton farmers, US introduces an export subsidy of $80/bale. As a result, exports rise by 20 bales and the world price of cotton falls to $360/bale.

(a) What impact does the export subsidy have on the price of cotton in the U.S. market?

(b) What is the cost of the export subsidy to the U.S. government?

(c) What is the total deadweight loss caused by the subsidy in the US?

(d) How large is the overall gain or loss for the US economy from the subsidy?

(e) How large is the overall gain or loss for Canada? (f) How large is the gain or loss for the world?

3 Export Subsidies for a Large Country US and Canada are two large countries in a cotton market. Assume that demand and supply curves are linear in both countries. With free trade the US exports 50 bales of cotton to Canada at a price of $400/bale. Under pressure from cotton farmers, US introduces an export subsidy of $80/bale. As a result, exports rise by 20 bales and the world price of cotton falls to $360/bale. (a) What impact does the export subsidy have on the price of cotton in the U.S. market? (b What is the cost of the export subsidy to the U.S. government? ) (c) What is the total deadweight loss caused by the subsidy in the US? (d) How large is the overall gain or loss for the US economy from the subsidy? ) (e How large is the overall gain or loss for Canada? (f) How large is the gain or loss for the world