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Abstract

Most agricultural export subsidies are targeted to specific countries. This paper demonstrates that in a standard general equilibrium model of international trade, a small targeted subsidy increase the welfare of the subsidizing country by exploiting differences in price responsiveness of demand relationships of importers. A single-product spatial equilibrium model then is used to show that targeted export subsidies can be used to increase the subsidizing country's welfare by exploiting transportation cost differences and the elasticity of excess supply of competitors or of markets supplied by competitors through subsidization of shared markets. In addition, an empirical model of the world wheat market is used to illustrate the theoretical conclusions.

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