The net national welfare effect of the production subsidy is a welfare loss represented by a production efficiency loss. Note, however, that the national welfare loss shown here arises under an assumption that there are no domestic distortions or imperfections. If market imperfections are present then a production subsidy can improve national welfare. In the second case we consider a consumption tax implemented by a small country which initially is importing the commodity from the rest of the world. The consumption tax inhibits domestic consumption by raising the consumers' price, but, has no effect on the world price or the domestic producers' price.
Imports fall as domestic consumption falls.
Producers face the same international price before and after the tax, thus their welfare is unchanged. The government collects tax revenue for each unit sold in the domestic market and that facilitates greater spending on public goods thus benefitting the nation. The net national welfare effect of the consumption tax is a welfare loss represented by a consumption efficiency loss. Note again, however, that the national welfare loss shown arises under an assumption that there are no domestic distortions or imperfections. If market imperfections are present then a consumption tax can improve national welfare.