Assume that the government of Bangladesh wishes to increase the production of leather by its domestic leather manufacturers, and simultaneously decrease the amount of leather products imported into the country. The government provides a subsidy of $2 per kilo of leather. The result is as follows:
- Before the subsidy, the quantity of leather produced in Bangladesh was 10 million kilos, and 20 million kilos were imported at a price of $5 per kilo.
- After the subsidy, the quantity of leather produced in Bangladesh is 15 million kilos, and only 15 million kilos are now imported. the price is still $5 per kilo.
- Assume that at any price below $1, the domestic quantity supplied would be zero (in other words, the domestic supply curve begins at $1.