Instructor Nathan Mahr Show bio Nathan has taught English literature, business, social sciences, writing, and history for over five years. He has a B.A. in Comparative History of Ideas from the University of Washington.
Cite this lessonLearn about subsidies and how subsidizing works in government and industry. Discover the controversy surrounding subsidies in economies around the world. Updated: 01/11/2023
A subsidy is a form of financial assistance or benefit, typically from the government, that is given to businesses, individuals, and other organizations in order to promote specific economic activities or advance certain social objectives. These incentives often target entire business sectors or communities, such as renewable energy. Subsidies can take various forms; some are direct payments to businesses, and others are indirect subsidies, such as tax breaks.
One of the primary aims of subsidies is to encourage the production of goods and services that are deemed important by governments. Commonly, these are products or services that provide a benefit to society as a whole and have been identified as potential areas for investment. Examples could include agricultural produce, housing, or infrastructure projects. Other times, subsidies are given to a particular industry in order to make it more competitive or to encourage innovation and research.
The relationship between those that give and receive subsidies is often complex and intended to be mutually beneficial. Those who receive the subsidies benefit from the extra financial support and can use it to expand production or invest in their business. Meanwhile, the societies and economies of governments who provide subsidies can benefit from the increased economic activity, higher employment levels, and innovation. It is essential that the parties involved are both transparent and accountable in their dealings and that any subsidies received are used for the purposes intended.
The act of subsidizing certain products or behaviors occurs in a variety of manners and contexts. Thus, there are many different ways to group and organize subsidies. One way they can be categorized is by determining if a subsidy is a direct subsidy or an indirect subsidy. Direct subsidies are direct payments from the subsidy provider (e.g., a government) to a subsidy receiver (e.g., a business, industry, group, or individual) typically in the form of grants or cash payments. Indirect subsidies are not direct payments, but rather, they provide a benefit to the subsidy receiver through exemptions, reductions in taxes or costs, or other means. For example, a large reduction in taxes for a particular industry or an easing of environmental regulations could be considered an indirect subsidy.
Subsidy types can also be categorized by their purpose or destination. Some of the most common types of government subsidies include:
Besides the various targets and purposes of subsidies, there are also many different forms of delivering them. Some of these forms include:
It can be helpful to explore some examples of subsidies in order to get a better understanding of how they work and the effects that they can have. One example of a subsidy is the US Export-Import Bank, which provides loans and risk insurance to foreign buyers of US-made goods. This helps businesses export their goods abroad while also helping to promote the diversification of the US economy.
Another example in the United States is with unemployment benefits and welfare programs. Here, the government provides subsidies in the form of direct payments to individuals who are unemployed or economically disadvantaged. This aims to provide economic stability for those individuals and families while also helping to stimulate the economy.
Finally, a hypothetical example of subsidies could be the investment in renewable energy sources by governments. Here, governments could provide direct subsidies to businesses who are producing renewable energy sources such as solar, wind, and hydroelectric power in an effort to reduce the reliance on fossil fuels. These subsidies could result in the reduction of production costs for renewable-centered businesses while also helping to reduce the environmental impact of energy production.
Government subsidies can be controversial because they are seen to interfere with the free market. When the government provides subsidies, it distorts the normal market and price signals that businesses should receive. Critics argue that this can lead to inefficient allocations of resources, as businesses may choose resources or activities that only benefit from a subsidy rather than those that are demanded by the market.
Furthermore, subsidies are seen by some as a form of crony capitalism, where certain businesses and industries receive benefits from the government that are not available to all. Other than being perceived as unfair, many critics worry that this will ultimately lead to a lack of competition, which will result in higher prices and lower quality goods.
Finally, government subsidies are also controversial because they come with a cost. Subsidies must be paid for either through taxes or through the printing of new money. As witnessed in the modern political landscape, the cost of any large government expenditure can quickly become a contentious issue.
The term subsidy refers to a type of benefit or economic assistance that is provided to businesses, individuals, or industries from the government or other large organizations. Subsidies usually target certain activities or large industries and sectors in order to encourage investment in that area, to reduce the cost of production, or to promote certain forms of behavior. They can also be used to help companies remain competitive against foreign competitors or to ensure the supply of certain essential goods and services. There are many different methods of differentiating between subsidies. One method is to decide if a subsidy is a direct subsidy or an indirect subsidy. A direct subsidy is a form of direct payment to the subsidy receiver that is typically in the form of cash payments or grants. An indirect subsidy is where the subsidy receiver gains a benefit through advantageous terms or conditions that do not have a predetermined cash value. Examples include the easing of industry-related regulations or large reductions in taxes.
Another method of categorizing subsidies is through their intended target or purpose. Some common industries or sectors targeted by subsidies include agriculture, renewable energy sources, exporting businesses, oil, housing, and healthcare. Aside from the targets of subsidies, there are also several methods for their distribution and provision. Subsidies can be issued through direct payments, tax concessions, grants, and other forms of economic assistance. They can also be provided through government procurement programs, assumption of risk, subsidized loans, and even direct purchases of stock. One real-world example of a subsidy provider is the US Export-Import Bank, which provides subsidized financing to foreign buyers of US exports in order to encourage the foreign purchase of US products. Although they have become relatively commonplace in many modern economies, government subsidies remain somewhat controversial due to their potential to interfere with the free market and to create environments of economic favoritism toward certain industries or businesses.