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Subsidy

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A supply and demand model with a subsidy.
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A subsidy is a quantity of money given to some entity, industry, or individual by the government. Subsidies are often given because the market may be under-providing some good or service, usually one with social benefits like environmental protection, education, or national defense.[1]

Theory[edit]

If an economy is not producing enough of some good or service, governments might have to provide it via a subsidy. Direct subsidies might include offering cash to a firm to do something, or the government establishing its own agency to complete or promote some task. In theory subsidies should provide more benefits than the costs in taxation.[2] Subsidies tend to increase output and increase the price of the subsidized good or service in question.[3][note 1] In practice, subsidies are a highly contentious political issue. Debates focus on the exact costs and benefits, corruption, favoritism for certain industries, and lobbying.

Examples[edit]

A number of industries and business can and do receive direct and indirect subsidies. As previously mentioned, most of these can seem benign or even good on paper, but are often highly controversial in the real world.

Direct transfers and contracts[edit]

The most obvious type of a subsidy is any direct transfer of funds or contract given to a firm to do something. For example, oil in Nigeria.[4]

Intellectual property[edit]

Sometimes patents and copyrights are thought of as a kind of subsidy, encouraging more activity in R&D to produce medicine that can be patented. Examples include the infamous EpiPen.[5]

Interest rates and loans[edit]

Low interest loans or the manipulation of interest rates can be done to increase certain activity, give people a chance at owning a home or just curry favor with potential political supporters.[note 2]

Taxes[edit]

On occasion, tax loopholes and special deductions may favor some firms or actives over others. In the United States qualifying to write off interest payments for a mortgage loan is a kind of tax subsidy to housing.[6]

Protectionism[edit]

Tariffs can be used to protect domestic industries and domestic producers, helping guarantee them income and employment. This redistributes income to domestic firms from foreign ones and often drives up consumer prices.

Regulations and zoning[edit]

Increasing the cost of building new apartments can enrich landlords at the expense of renters.[please explain]

See Also[edit]

Notes[edit]

  1. Subsidies can be provided to both consumers and producers. Subsidies to consumers lower the prices they pay, while the increase in demand ultimately raises prices.
  2. This can frequently happen in nations without an independent central bank where governments can control money for very overt political reasons.

References[edit]

  1. Chappelow, Jim. "Subsidy Definition". Investopedia. Retrieved 2020-02-11.
  2. "Subsidy" Encyclopedia Brittanica.
  3. Kling, Arnold. Subsidies Raise Prices EconLib.
  4. Nigeria Prioritizes Fuel Subsidy Over Health and Education Bloomberg.
  5. Keshavan, Meghana. "5 reasons why no one has built a better EpiPen". STAT. 2016-09-09. Retrieved 2020-02-11.
  6. McWhinney, James. "Calculating the Mortgage Interest Tax Deduction". Investopedia. Retrieved 2020-02-11.