What are common reasons that governments enact export restrictions? What are the possible negative consequences of such restrictions?
Answer: A country may limit exports of a product that is in short supply worldwide in order to favor domestic consumers. Typically, greater supply drops local prices beneath those in the intentionally undersupplied world markets. However, this discourages domestic producers from increasing output and encourages them to smuggle output to sell abroad. It also encourages foreign producers to develop substitutes or production of their own. Countries also fear that foreign producers will price their exports so artificially low that they drive domestic producers out of business, after which they charge monopoly prices. However, competition among foreign producers limits their ability to charge exorbitant prices. The ability to price low abroad may result from high domestic prices due to a lack of competition at home or from home country governmental subsidies.