When and How Should Commodity Buyers Subsidise Freight?

Mike Smart

Journal of Transport Economics and Policy, 2015, vol. 49, issue 2, 187-199

Abstract: A stylised international commodity trade model is used to show that when economic geography is suitable and collective action is feasible, it can be in the buyers' interests to subsidise freight. Unit price subsidies to the highest-cost supplier provide the greatest consumer benefit. Free on Board (FOB) pricing is one way to implement such a subsidy. The subsidy scheme requires a buyer cartel, which is vulnerable to defection. These analytical insights are used to interpret the causes of initial success and ultimate failure of the iron ore price benchmarking system. © 2015 LSE and the University of Bath

Date: 2015
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