Discuss two reasons why a country's government could conclude that imposing an export duty on a product the country exports is a good idea.

Question

What will be an ideal response?

Answer 1

POSSIBLE RESPONSE: Here are three possible reasons. First, the country's government may use export taxes or duties, as it would any other tax, to raise revenue for the government. This revenue equals the unit amount of the duty times the volume of exports. The extra government revenue can then be used to expand under-provided government services such as education or health care. Second, the country's government may use export taxes to benefit local consumers such as households. The duty effectively lowers the price domestic producers receive for their products and reduces the amount of product they export. This ultimately results in lower prices for domestic consumers of the product as producers try to increase domestic sales by lowering their price. If the domestic consumers of the product are firms in other industries that use the product as an input to production, the export tax artificially lowers their production costs and encourages expansion of these user industries. A third reason is that, for a large country, the government may be using the export tax to gain national well-being at the expense of foreign buyers, by increasing the world price of the exported product.