Question

Under the assumption of perfectly competitive market, export subsidies:
a. Raise price above free trade price for exporting country
b. Lower price below free trade price for exporting country
c. Both a and b
d. None

Answer 1

a. Raise price above free trade price for exporting country

The subsidy effectively raises the price that the producer receives for each unit of the good produced and sold. At the same time, the subsidy will not have an effect upon the domestic price that consumers pay. In other words, the subsidy will cause the price received by producers (we'll call this the producer price) to rise above the price paid by consumers (called the consumer's price).