Consider the case of an export subsidy for an importing country that has some monopsony power—that is, the case in which the foreign supply-of-exports curve is upward-sloping. Use a graph like that in Figure 11.4.
a. In comparison with free trade, what is the effect of the export subsidy on the international price and the quantity traded?
b. The importing country now imposes a countervailing duty that returns the market to the initial free-trade quantity traded. In comparison with the market with just the export subsidy, explain why the countervailing duty is good for the world. Explain why the countervailing duty can also increase the well-being of the importing country?