4

3.2.2

Externalities
In the Figure (2) below, suppose the private domestic supply and demand curves are
given,respectively, by S0 and d0. Consequently, with a world price of p*, equilibrium quantities
producedand consumed are Q0 and Qd. Now suppose that the production process is
characterised by a positiveexternality that is not taken into account. As a result, the initial
supply curve is not representative of the benefits of production. The social costs of
producing each unit would be lower than what is portrayed by the supply curve S0, which
shows only the private cost. If the externalities are taken intoaccount, the new supply curve
would be S1, which indicates a lower unit cost of production.If the world price and the demand
curve are assumed to reflect the true social costs, then the domestic production of the good at Q0
would be less than the socially optimal level of production Q1. The costto society of this
underproduction would be the area cde. To see this, assume a total subsidy of
theamount dfgp* is provided, which expands output to Q1. The total cost of the
imports being replacedas a result of the subsidy is Q0Q1dc, but the total cost to society from
producing the incrementaloutput would be Q0Q1de. The difference is the area
cde.Therefore, if a positive externality in production exists, a production subsidy could be used
to increasewelfare. Again, a tariff would be inferior to a subsidy as an instrument of
intervention, since it woulddistort consumption and increase the cost to society of producing
the expanded output.Figure (1) Figure (2)We have seen that the overall impact in
production subsidy a welfare loss arises from the applicationof the subsidy, since the
subsidy creates a wedge between the optimal price (world price) and theactual price
paid to domestic producers, and in export subsidy is negative at home country, sincedomestic
consumers pay a higher price for a product that they are blocked from sourcing at a
lower price from the world market. this leads to welfare losses for consumers. But if a positive
externality in production exists, a production subsidy could be used to increase welfare.

4.

A Case Study on the Effects of Subsidy
4.1

The externality in fisheries

The

issue of fishery subsides is receiving growing attention. The WTO Ministerial declaration
agreedat Doha in 2001 commits WTO Members to negotiations to clarify and improve
WTO disciplines
onfisheries subsidies. In 2002 at the world Summit on Sustainable developments, He
ads of Statecalled for the elimination of environmentally harmful fisheries subsidies.


5
The reason is that marine resources have deteriorated severely over the last 30 years and
subsidiesarising from government efforts to preserve employment in the shipbuilding
and fishing industry, for example, have been blamed as one of the factors responsible for the
overcapacity of fleets and theover-exploitation of fish stocks.
4.2

Fishery subsidies in Senegal
The fishing industry is Senegals largest source of foreign exchange. Fishery exports in
2003amounted to US$282 million, constituting 24 per cent of total merchandise exports in 2003,
and 4.3 per cent
of GDP. Fishing is the second most important source of employment, accounting for 15 per cent
of the economically active population. Fish also providethe Senegalese population with 75 per
cent of their animal proteins. Food security is, therefore, animportant policy objective of
the government in respect of its fishery sector.
Historically, governmentassistance to the fishery sector has seen two main phases. In the 1970s,
support to the sector took the form of direct production subsidies to industrial fishing.
Subsequently, the government turned tosubsidizing small-scale fishing. At first, support
to small-scale fishing was in the form of subsidiestargeted to increasing output by means
of encouraging the introduction of better equipment,modernization of vessels and
improving infrastructure. Thereafter, state financial assistance to fishingwas aimed
at providing marketing support and encouraging exports. free-trade zones and duty-
freeexport company status, the lom Convention, export subsidies, fisheries agreements
anddevaluation all contributed significantly towards increasing exports. According to recent
estimates(UNEP, 2004), during the 1990s and until today the main modalities for
granting fisheries subsidies inSenegal have been: Tax reductions on fishing equipment
for the modernization of pirogues. The accumulated amountgranted by
the government is estimated at CFAF 2.01 billion (approximately US$2.7
million). A fuel subsidy for the enhancement of fishing equipment and to
prolong sea trips and open upfishing areas. the fuel subsidy to small -scale fishing
alone rose from less than CFAF 2 billion in 1986to over CFAF 6 billion in 1998
(approximately US$10 million). Subsidies to small-scale fishing through the Caisse
Nationale de Crdit Agricole du Sngal(CNCAS), the funds portfolio has remained
below CFAF 3.2 billion in ten years of intervention inthe sector. Subsides to industrial
fishing through the Fonds de Promotion Economique (FPE). this includes: (i)an economic
advancement fund, which is a credit line of CFAF 39 billion; (ii) a guarantee
fund (tocover risks involved in lending to SMES); and (iii) a participatory loans
fund of CFAF 3 billion set up by the State to offset inadequate equity of
entrepreneurs. Investments in infrastructures, including the construction of fishing
wharves and the creation of theCentral fish Market (CFM). The latter was built in
1992 at a cost of CFAF 3 billion (90 per cent wasfinanced by Japan). The CFM was
enlarged in 1998 at a total cost of over CFAF 3 billion (99 per centfinanced by
Japan). Export subsidies (until 1994). By way of example, export subsidies to the trawler
fishing industryin the fiscal year 1991/1992 amounted to CFAF 12 billion
(approximately US$18 million). In 1995, a subsidy of CFAF 1.7 billion was granted
to some 30 Senegalese companies as a meansof financing up to 30 per cent of their
investments to adapt to European standards, in cooperation withCooperation
Franaise.Senegal has concluded many fishing agreements
with foreign countries, by far the mostimportant among them being those with Japan
and the European Union. Those with Japan relatemainly to tuna, while those with the
European Union concern coastal demersal and, more recently,

6
pelagic fisheries. The European Communitys total financial contribution to Senegal is of

16 milliona year during 2002-2006.4.2.1

The effect of Senegal subsidyFisheries subsidies are firmly on the international agenda. It has
been argued that fisheries accessagreement s is the kinds of subsidy that have most impact on
developing countries. These subsidieshave both positive which providingmarketing
support and encouraging exportsand increasing stock depletion of animal proteins for the
domestic market, and decreasing the prices of product and extendfree-trade zones and duty-free
export company, butnegative impacts which are very site and contextspecific. Whilst there
appears to be a general consensus that subsidies inevitably lead to over-exploitation of fish
stocks and by implication negative social and economic impacts, this is notnecessarily the case.
A more important factor appears to be the existence of an effective fisheriesmanagement system,
which in some cases is paid for by subsidies. It is clear that the removal of subsidies alone will
not solve the problem of over-exploited fisheries.
5. Conclusion
This paper provides several definitions of subsidies. Subsidies play an important
role in makingdomestic goods and services artificially competitive against import. They have
also positive andnegative effects on the price system and consumer consumption.From
theoretical point of view, we have seen that in case of perfect competition the effects
of subsidizing are always negative. Therefore, in case of imperfect competition there
may be positiveeffects in two cases of economies of scale and externalities.In term of
externalities case there is too much negative effect but in the case of Senegal fishery itappears
positive effect in labour protection, and in economies of scale it decreases the price of
the product and open free-trade zone and duty-
free export company and increase the output of the product.
6. References


Bhagwati, J. (1971) the Generalised theory of
distortions and welfare, in J. Bhagwati et.al (EDS), Trade, Balance of
Payments, and Growth: Papers in International Economics inhonour of Charles P.
Kindleberger , Amsterdam: North Holland.

Deardorff's Glossary, http://www-personal.umich.edu/~alandear/glossary/.

Grossman, G. (1990) promoting new industrial activities: a survey of recent
arguments andevidence, OECD Economic Studies, No. 14, paris: oeCd.

International Fish Trade and Food Security, Case of
Senegal,http://www.fao.org/DOCREP/006/Y4961E/y4961e0i.htm

Johnson, H. (1965) optimal trade Intervention in the presence of domestic
distortions,in Baldwin et al, Trade, Growth and the Balance of Payments,
Amsterdam: North-Holland press.

WORLD TRADE REPORT 2006, Exploring the links between subsidies, trade and
the WTO,World Trade Organization, 2006 10, January 2010