Suppose Home is a small exporter of wheat. At the world price of 100 US dollars per tonne, Home growers export 20 tons of wheat. Now suppose the Home government decides to support its domestic producers with a specific export subsidy of 40 US dollars per tonne. Use Figure 1 to answer the following questions: (a) Explain why consumer and producer surplus can be used to gauge the change in welfare caused by the export subsidy on individuals and firms? (b) What is the quantity exported by Home under free trade and with the export subsidy? (c) Calculate the effect of the export subsidy on consumer surplus, producer surplus, and government revenue; depict each of these in a graph. What is the overall net effect of the export subsidy on Home welfare?

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