Bounties on Exportation and Prohibitions of Importation

Ricardo examines two policies that push trade away from the pattern set by relative costs. An export bounty pays producers for selling abroad, while an import prohibition blocks foreign goods; both can raise the home price and expand a protected industry, but neither creates productive resources for free.

Term	Meaning
Export bounty	A payment from the government for each unit exported
Import prohibition	A legal ban, or near-ban, on bringing a foreign good into the country
World price	The price at which a good can be bought or sold internationally
Domestic price	The price paid inside the home market
Producer receipt	The market price plus any bounty received by the seller
Fiscal cost	The tax revenue the government must raise to fund a policy
Artificial direction	A use of capital made profitable by policy rather than by underlying comparative cost

The chapter's central mechanism is a price wedge: policy separates the return received by a favoured producer from the price that open trade would otherwise support. The higher protected return attracts land, labour, and capital, but those resources must leave some other production.

Ricardo therefore asks more than whether the protected industry grows. He asks what the country gives up to make it grow and who pays for the difference.

An export bounty adds a public payment to the price an exporter receives. If foreign buyers pay £100 and the bounty is 10%, the exporter receives £110; production expands because the protected trade now appears more profitable.

Competition connects export and home sales. A producer will not willingly sell at home for far less than the bounty-supported export return, so the domestic price can rise toward that protected receipt. The policy can consequently charge home consumers more while also requiring taxes to finance exported units.

foreign buyer pays £100
          |
          +--> exporter receives £100
taxpayer  +--> adds £10 bounty
          |
          +--> producer receipt £110

An import prohibition removes the foreign alternative that would otherwise cap the home price. Domestic producers may then charge up to the cost of home production, even when foreign suppliers could deliver the good more cheaply.

Unlike a bounty, a prohibition need not show a direct treasury payment. Its cost is less visible: consumers pay the protected price, and productive resources move into a higher-cost use.

Suppose imported corn costs £100 per unit, while expanding home production costs £120. Compare open trade, a 10% export bounty, and an import prohibition.

Policy	Domestic price	Producer receipt	Visible treasury cost per exported unit	Main burden
Open trade	£100	£100	£0	None from protection
10% export bounty	about £110	£110	£10	Taxpayers and home buyers
Import prohibition	£120	£120	£0	Home buyers

If 1,000 units receive the bounty, the treasury pays £10,000. If home buyers purchase 4,000 units at £110 rather than £100, they pay another £40,000. These are not automatically identical to the economy's net loss—some receipts are transfers to producers—but they reveal who finances the protected return.

The Lab turns the miniature into a manipulable model. Set the world price and the higher home cost, then vary the bounty and switch the prohibition on or off; watch the domestic price, producer receipt, consumer premium, and treasury cost move.

The model deliberately simplifies quantities and assumes the bounty-supported export return influences the home price. Its purpose is to expose the accounting and the direction of incentives, not to forecast a real market.

Ricardo rejects the mercantilist habit of treating exports as a benefit by themselves. Exports are useful because they purchase imports; encouraging an export that costs more resources than the imports it obtains can make the country produce more for less return.

The right comparison is between the imports obtained and the full opportunity cost—the best alternative output sacrificed—rather than between a larger and smaller export total.

Protection can enrich the owners and workers already placed in the favoured trade, but a higher receipt does not prove that national income has increased. Part of the gain may be a transfer from consumers or taxpayers, and part may be offset by lower production elsewhere.

Group	Export bounty	Import prohibition
Protected producers	Receive a higher effective return	Sell at a higher home price
Domestic consumers	May pay the bounty-supported price	Pay the protected home price
Taxpayers	Finance bounty payments	No direct payment necessarily shown
Other industries	Lose resources attracted by protection	Lose resources attracted by protection

This distinction between distribution and creation is essential. A policy can redistribute purchasing power toward one industry while reducing the total goods obtainable from the country's resources.

Ricardo's rule is to let capital follow relative costs unless a clear reason justifies intervention. In his model, a bounty or prohibition makes the nation abandon cheaper foreign supply or subsidise production that cannot stand on its own.

A modern reader should still test assumptions that Ricardo mostly holds fixed. Temporary support might be defended for learning, security, market power, or adjustment, but each claim needs evidence, a time limit, and an honest account of consumer, fiscal, and opportunity costs.

open-trade test
      |
      +--> can foreigners supply it for fewer resources?
                    |
             yes ---+---> import and produce something else
                    |
              no ---+---> produce at home

Evaluating protection means tracing the complete system rather than stopping at jobs or output in the visible industry. Begin with the unprotected price, identify the wedge, and follow both the money and the displaced resources.

Question	What it reveals
What is the world price?	The open-trade benchmark
What return does policy guarantee?	The size of the incentive wedge
Who pays the higher return?	Consumer and taxpayer incidence
What production expands?	The visible beneficiary
What production contracts?	The opportunity cost
Is the policy temporary and measurable?	Whether an exceptional rationale can be tested

The last question matters because protection often creates a constituency that benefits from keeping it. A temporary argument can become a permanent transfer unless success and exit conditions are explicit.

Ricardo's Chapter XXII treats trade protection as a redirection of resources, not a machine for creating wealth.

• An export bounty raises the effective return on exports and must be financed by taxpayers.
• A prohibition removes the foreign price cap and lets higher-cost domestic production expand.
• Home consumers can pay more even when a policy is described as helping exporters.
• A larger protected industry does not show a larger national product; resources have alternative uses.
• Exports are a means of obtaining imports, not an end to maximise regardless of cost.
• Modern exceptions to Ricardo's rule require explicit evidence, measurement, and an exit condition.

A reader is ready to continue when they can trace both the visible benefit and the hidden cost of a trade restriction.

• [ ] Can you distinguish the world price, domestic price, and producer receipt?
• [ ] Can you explain how an export bounty can affect home buyers as well as taxpayers?
• [ ] Can you explain why a prohibition has a cost even without a treasury payment?
• [ ] Can you calculate the fiscal cost of a per-unit bounty?
• [ ] Can you name the opportunity cost of moving resources into a protected trade?
• [ ] Can you state what evidence a modern exception to Ricardo's rule would need?