Subsidy

Subsidy is monetary or natural assistance provided by the state or an institution to other states, institutions, or individuals. It helps to promote social benefits or economic policies.

How a Subsidy works

A subsidy can be given to an individual or a business entity. The subsidy is a privileged form of financial support. It can either provide monetary support for certain actions or reduce the burden on the recipient.

During the depression era, agricultural subsidies helped farmers to increase their profits. It allowed them to hire more workers. If the subsidies had been taxed, consumers would have faced higher food prices and suffered again.

The success of the subsidy can be assessed in many ways. Many economists consider subsidies successful only if they have improved the economy as a whole. Politicians consider a subsidy successful if it has improved cultural and political purposes, even if there has been no economic improvement.

Types of Subsidies

Some sectors of the economy may be in difficulty and the general economy can't help them, in such times subsidies can come to support them. Subsidies help to reduce the burden or help with new beginnings, startups.

Direct and indirect subsidies. Monetary payments to certain individuals, groups, or industries are direct subsidies. If there is no predetermined amount, no actual money expenses, but necessary goods or services are provided at reduced prices, these are indirect subsidies.

Government subsidies. The government can provide subsidies in various forms. The most common individual subsidies are welfare payments and unemployment benefits. These subsidies are needed to help people in a difficult economic situation.

Student loan subsidies are needed to keep people continuing their education. Several American families have got health care subsidies through the Affordable Care Act (ACA). These subsidies reduce premiums and go straight to the insurance company. To fight against international competition and price increases, the government may give subsidies to organizations in a chosen industry. Most subsidies in the U.S. go to agriculture, oil companies, utilities, and financial institutions.

Advantages and disadvantages of Subsidies

There must be a reason (economic or political) for getting government subsidies. Some reasons are based on the theory of socio-economic development, according to which certain industries need to be fenced from external competition in order to get the maximum internal income.

From the economists' point of view, there are no subsidies in a free market economy. When there are subsidies in a market economy, the economy becomes a mixed one. There is a constant debate about the benefits of subsidies and the level of economic mixing.

Advantages. Some believe that subsidies are necessary for certain organizations in certain industries for maintaining jobs. Others believe that a mixed economy with subsidies is efficient because it provides a socially optimal level of goods and services.

There are market circumstances in modern economies. This is due to a big drop in the actual supply compared to the theoretical supply (deficit).

There are market circumstances in modern economies. This is due to a big drop in the actual supply compared to the theoretical supply (deficit). There are ways to eliminate this problem. One of them is to subsidize a good or service with a low supply. It compensates some of the manufacturers' expenses for bringing products to market. To put it another way, subsidies are needed for balancing when there is a market failure in a certain industry.

An economic activity that indirectly benefits a third party creates a positive external effect. Simply put, it is providing the market with goods and services to meet most of the demand. But the third party is not a participant in the solution, so the activity is performed until the activity participants receive a direct benefit. Therefore, the state provides subsidies to those who create positive externalities or eliminate negative externalities.

Disadvantages. There are also those who believe that the market should determine whether a business survives or not. If a business fails, resources are directed to more efficient use and profitable income. Proponents of free market and business survival believe that subsidies are an inefficient use of resources and an inappropriate diversion of the market. They also believe that government subsidy spending is not as effective as expected predictions. In addition, subsidies contribute to the political process's corruption. There is even a theory of an agreement between the state (politicians, who want to get profit) and big business, which wants to avoid competition.

Of course, the initial purposes of the subsidy are well-intentioned. But increasing the profits of people with benefits affects their desire to keep getting the subsidy, even if it is no longer necessary. This creates an interest of mutual benefit between political and business interests.