Question

What is the the effect on the foreign price with a combined domestic production subsidy and consumption tax applied by a small country on the same good at the same level?

Answer 1

The effect these factor will have on Import is that it will lower Imports and decrease in imports = Increase in foreign prices

Step-by-step explanation:

The effect on the foreign price when there is a combined domestic production subsidy and consumption tax applied on a good at the same level

i) when consumption tax is applied : The consumer price will increase by the amount of the tax and the demand for the good will decrease while the producer price will remain the same

ii) when production subsidy is applied : producer price will increase while the consumer price will remain unchanged

when they are both set at the same level ( i.e. consumption tax and production subsidy ) The producer price = consumer price

The effect these factors will have on Import is that it will lower Imports and decrease in imports = Increase in foreign prices