The Government Might Provide A Subsidy When? (Solution found)

Governments seek to implement subsidies to encourage production and consumption in specific industries. When government subsidies are implemented to the supplier, an industry is able to allow its producers to produce more goods and services.

How does government provide subsidy?

Basically, subsidies are provided by the government to specific industries with the aim of keeping the prices of products and services low for people to be able to afford them and also to encourage production and consumption.

Who does the government give subsidies to?

While many industries receive government subsidies, three of the biggest beneficiaries are energy, agriculture, and transportation.

What is govt subsidy?

Subsidy. Subsidy is a transfer of money from the government to an entity. It leads to a fall in the price of the subsidised product. Description: The objective of subsidy is to bolster the welfare of the society. It is a part of non-plan expenditure of the government.

Why does government provide subsidies on products?

When market imperfections exist, it is the right of governments to use subsidies to palliate those that are ill-advantaged. For example, in a low-monetized economy, subsidies can achieve more efficient social policy – it may be easier to slash food staple prices to consumers than to make social transfers.

What is an example of a government subsidy?

Examples of Subsidies. Subsidies are a payment from government to private entities, usually to ensure firms stay in business and protect jobs. Examples include agriculture, electric cars, green energy, oil and gas, green energy, transport, and welfare payments.

How do governments get subsidies for farmers?

Farm subsidies are administered through the Farm Service Agency. You will want to work closely with your local FSA office, which can help you identify programs and apply. You can find your state office by visiting a USDA website here: Click on your state.

How do governments use subsidies quizlet?

Why do governments provide subsidies? – Subsidies are used to increase revenues of producers. – Subsidies are used to make necessities affordable for low-income consumers. – Subsidies are used to encourage production and consumption of desirable goods (e.g. vaccines + education).

What are subsidies incentives?

The term “incentive’, generally means encouraging productivity. It is a motivational force, which encourages an entrepreneur to take a right decision and act upon it. “Subsidy” means a single lump sum of money that is given by a Government to an entrepreneur to cover the cost.

Where do government subsidies come from?

Subsidies are provided by both federal or national governments and local governments. The United States is technically a free market, but direct subsidies provided by the U.S. government influence market prices and economic growth greatly.

What is subsidy and how does it work?

A subsidy is a direct or indirect payment to individuals or firms, usually in the form of a cash payment from the government or a targeted tax cut. In economic theory, subsidies can be used to offset market failures and externalities to achieve greater economic efficiency.

What is a subsidy quizlet?

A subsidy is a payment made to a firm or individual, made by the government for the purpose of increasing the purchase or supply of a specific good. Specific Subsidy. Subsidy is a fixed amount per unit of output.

How Do Government Subsidies Help an Industry?

Governmentsubsidieshelp an industry by covering a portion of the cost of producing a good or service by offering tax credits or reimbursements, or by covering a portion of the cost a consumer would pay to purchase a good or service. Tax credits and reimbursements are two types of government subsidies.

Effect of Subsidies on Supply

Governments are attempting to establish subsidies in order to stimulate production and consumption in certain sectors. When government subsidies are provided to suppliers, an industry is able to increase the amount of products and services produced by its manufacturers. Increased overall supply of that item or service results in increased demand for that good or service, which results in a decrease in the overall price of that good or service. Therefore, when the government provides subsidies to the provider, the result is a win-win scenario for both the supplier and for the customer as a whole.

Meanwhile, customers benefit from the product at a lower cost than would otherwise be the case since suppliers do not have to charge outrageous prices in order to break even on the manufacturing costs they incur.

Tax Credits

Government subsidies, which are generally in the form of tax credits, can assist potential customers with the cost of a commodity or service on the consumer side. For example, the move to more renewable sources of energy is a fantastic illustration of this concept. Due to the fact that green economic models are still in their infancy, there is currently little demand for new energy-saving technologies. Government subsidies or tax credits may be used to affect consumer interest in adoption by alleviating the high expense associated with adoption.

This means that consumer-targeted subsidies will not necessarily boost supply since producers will not be motivated or paid to create more as a result of the subsidies.

The purchase of an electric or hybrid car may also be eligible for a tax credit or subsidy in some states, in the same spirit.

The Bottom Line

To assist potential consumers with the cost of a commodity or service, governments can provide subsidies, which are most often in the form of tax credits. The move to more renewable sources of energy, for example, is a fantastic illustration of this principle. The current demand for new energy-saving technologies is limited since green economic models are still in their infancy. Government subsidies or tax credits may be used to affect consumer interest in adoption by alleviating the high cost of adoption.

Consumer-targeted subsidies, on the other hand, will not necessarily boost supply since producers will not be encouraged or paid to produce more.

The purchase of an electric or hybrid car may also be eligible for a tax credit or subsidy in some states, which are discussed below.

This benefits the renewable energy sector by allowing more people to acquire the items linked with that business without having to bear the whole financial burden of those purchases.

Subsidy Definition

A subsidy is a benefit that is provided to an individual, business, or institution, and is generally provided by the federal government. It can be either direct (as in cash payments) or indirect (as in credit card payments) (such astax breaks). It is customary for a subsidy to be provided in order to relieve some form of burden, and it is frequently deemed to be in the general public’s best interests when it is provided to promote a social good or an economic policy.

Key Takeaways

  • A subsidy is a direct or indirect payment made to individuals or businesses by the government, which is typically in the form of a cash transfer or a targeted tax reduction. Subsidies, according to economic theory, can be used to compensate for market failures and externalities in order to achieve higher economic efficiency. But opponents of subsidies point to difficulties in estimating appropriate subsidies, dealing with unexpected expenses, and avoiding political incentives from making subsidies more costly than they are useful.

Understanding Subsidy

A subsidy is typically some type of payment made to an individual or corporate organization that is receiving it, whether it is delivered directly or indirectly. Subsidies are often regarded as a special sort of financial assistance because they relieve the recipient of an associated burden that had previously been imposed on him or her, or because they encourage a certain conduct by giving financial support. Subsidies have an opportunity cost associated with them. Consider the agricultural subsidies provided during the Great Depression: it had highly apparent impacts, with farmers reporting increased earnings and the hiring of extra staff.

Money from the subsidies had to be deducted from individual income tax returns, and customers were stung a second time when food costs rose at the supermarket.

Types of Subsidies

Subsidies are often used to benefit specific sectors of a country’s economy. If it can alleviate the pressures put on faltering sectors, it can also promote new advances by giving financial assistance for their initiatives. Frequently, these regions are not adequately supported by the operations of the main economy, and they may even be undermined by activity in other economies.

Direct vs. Indirect Subsidies

Direct subsidies are those that entail the direct payment of monies to a specific individual, organization, or industry. They are also known as direct payments. Those that have no preset monetary value or that do not entail real financial outlays are referred to as indirect subsidies. They can include initiatives like as price reductions for essential products and services, which can be funded by the government, among other things. This permits the necessary commodities to be acquired at a lower cost than the current market rate, resulting in savings for individuals who are intended to benefit from the subsidy.

Government Subsidies

The government provides a wide range of subsidies to a wide range of industries. Individual subsidies include welfare payments and unemployment benefits, which are two of the most popular kinds of financial assistance. The purpose of these forms of subsidies is to provide assistance to persons who are experiencing temporary economic hardship. People are encouraged to continue their education via the use of other incentives such as discounted interest rates on student loans and other forms of financial assistance.

These subsidies are intended to reduce the amount of money that people have to pay out of pocket for insurance premiums.

Subsidies to companies are provided to assist a sector that is failing to compete against worldwide competition that has reduced prices to the point where the local firm would be unprofitable without the subsidy.

History has shown that agricultural subsidies, financial institutions subsidies, oil company subsidies, and utility company subsidies have accounted for the great bulk of subsidies in the United States.

Advantages and Disadvantages of Subsidies

The government provides a variety of different types of subsidies. Unemployment insurance and welfare payments are two of the most popular forms of individual subsidies. Subsidies of this nature are intended to assist persons who are experiencing temporary financial hardship. People are encouraged to continue their education through the use of other incentives such as lower interest rates on student loans. The Affordable Care Act (ACA) made some U.S. families eligible for subsidies depending on their household income and size, which were implemented in 2010.

As a result, the monies connected with the subsidies are sent directly to the insurance company to whom the premiums are due, resulting in a reduction in the amount of money that must be paid by the family.

For much of American history, subsidies have mostly benefited four industries: agricultural, banking and financial organizations, oil businesses, and electric power and water utilities.


Pro-subsidy Economists say that providing subsidies to certain industries is essential for assisting in the support of firms and the employment they produce. The mixed economy is supported by economists who think that subsidies are justified in order to offer the socially optimal level of goods and services, which will lead to economic efficiency as a result of the mixed economy. In modern neoclassical economic models, there are instances in which the real supply of an item or service goes below the theoreticalequilibriumlevel, resulting in an undesired shortage and what economists refer to as a market failure.

  • The subsidy decreases the cost of bringing the item or service to market for the producers who receive it.
  • In other words, according to general equilibrium theory, subsidies are required when a market failure results in an insufficient amount of output in a particular area of the country.
  • Some claim that commodities or services produce what economists refer to as “positive externalities,” which are beneficial to the economy.
  • However, because the third party is not a direct participant in the decision, the activity will only take place to the degree that it directly helps those who are directly engaged, leaving potential societal benefits on the table as a result of this.
  • The inverse of this type of subsidy is the imposition of a charge on activities that generate negative externalities.

This is a common approach that is now being used in China and other South American countries.


Other economists, on the other hand, believe that free market forces should determine whether a company survives or fails. Even if it fails, the resources are redeployed to a more efficient and lucrative application. It is their contention that subsidies to these enterprises just serve to maintain an inefficient allocation of scarce resources. Subsidies are viewed with suspicion by free market economists for a variety of reasons. Many people believe that government subsidies needlessly distort markets, limiting efficient results and diverting resources away from more productive applications and onto less productive ones.

  1. Official expenditure on subsidies, according to some critics, is never as successful as government predictions indicate it would be.
  2. Another issue, as critics point out, is that the act of subsidizing contributes to the corruption of the democratic process.
  3. Companies frequently seek protection from the government in order to protect themselves from competition.
  4. Even if a subsidy is introduced with the best of intentions, without any hint of conspiracy or self-interest, it increases the earnings of those who benefit from it, creating an incentive to fight for its continuation long after the necessity or utility of the subsidy has passed.
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Special Considerations

There are a number of different metrics that may be used to assess the success of government subsidies. Most economists regard a subsidy to be a failure if it does not result in a general improvement in the economy. Policymakers, on the other hand, may still deem it a success if it aids in the achievement of a different goal. Despite the fact that most subsidies are long-term failures in the economic sense, they nonetheless accomplish cultural or political objectives. When it comes to the Great Depression, we may see an illustration of these opposing assessments.

  1. Their policy objective was to keep food prices from dropping further and to safeguard small farmers from being harmed.
  2. However, the economic ramifications were completely different.
  3. Those who did not work in the agricultural business fared badly in terms of absolute economic well-being.
  4. Subventions for renewable (non-oil-based) energy sources totaled more than $60 billion in the United States Department of Energy (DOE) fiscal years 2012 and 2013.
  5. The receiving firms, on the other hand, were unable to generate a profit, and oil prices fell in 2014.

People who directly or indirectly benefit from subsidies tend to be the greatest supporters of them, and the political motivation to “bring home the bacon” to ensure support from special interests is a potent magnet for politicians and policymakers alike to support them.

Wha is the difference between direct and indirect subsidies?

Evaluation of the effectiveness of government subsidies may be done in a variety of ways. When a subsidy fails to enhance the general economy, most economists consider it a failure. It may be considered a success by policymakers, however, if it contributes to the achievement of another goal. Despite the fact that the majority of subsidies are long-term failures in the economic sense, they nonetheless fulfill cultural or political objectives. The Great Depression served as a good illustration of these opposing viewpoints.

  1. Their policy objective was to keep food prices from dropping further and to safeguard small farmers from being exploited.
  2. It was considerably different in terms of the economic impact.
  3. In absolute terms, those who did not work in the agricultural business fared badly.
  4. More than $60 billion in subsidies were awarded by the Department of Energy (DOE) to renewable (non-oil-based) sources of energy in the years 2012 and 2013 combined.
  5. But the receiving corporations were unable to earn a profit, and the price of oil fell precipitously in 2014.
  6. People who directly or indirectly benefit from subsidies tend to be the greatest supporters of them, and the political motivation to “bring home the bacon” to ensure support from special interests is a potent magnet for politicians and policymakers alike to favor subsidies.

What is the position of subsidy advocates?

Subsidies are available in mixed-income societies. Proponents say that providing subsidies to certain industries is critical to assisting in the support of businesses and the employment they generate. They also argue that subsidies are appropriate in order to offer the socially optimal level of goods and services, which will result in greater economic efficiency in the long run.

What is the position of subsidy opponents?

Subsidies are prohibited in a free market economy, at least on a technical level. If a firm survives or fails, opponents of government subsidies believe that market forces should be the determining factor.

If it fails, those resources will be redistributed to a more efficient and profitable use in the future. They contend that subsidies unduly distort markets by diverting resources away from more productive applications and onto less productive ones, so preventing efficient outcomes from occurring.


A subsidy is a financial or tax benefit provided by the government to individuals or enterprises in the form of cash, grants, or tax breaks, among other things. Direct Taxes A direct tax is a form of tax that an individual pays to the government that is paid directly to the government. Examples of direct taxes include income tax, poll tax, property tax, and tax credits that help to increase the supply of specific goods and services. Subsidies enable customers to obtain lower-priced goods and services by reducing competition.

Externality An externality is a cost or benefit of an economic activity that is experienced by a third party that is not involved in the economic activity.

Fiscal Policy is a term that is used to refer to a set of rules that govern how money is spent.

Essentially, subsidies are financial assistance provided by the government to certain businesses with the goal of keeping the prices of goods and services low so that consumers can afford them while simultaneously encouraging the production and use of such goods and services.

Types of Subsidies

In the form of cash, grants, or tax breaks, a subsidy is an incentive provided by the government to individuals or enterprises. Direct Taxes Among the types of taxes that individuals pay are direct taxes, which are levied on them directly by the government and are paid directly to the government. Examples of direct taxes include income tax, poll tax, land tax, and tax breaks that help to increase the supply of specific goods and services. In exchange for subsidizing certain products and commodities, customers can obtain lower-cost goods and services.

Externality Externalities are costs or benefits associated with economic activity that are experienced by a third party that is not involved in the activity itself.

Fiscal Policy is a term that is used to refer to a set of policies that are implemented by the government to help the economy grow more quickly.

Primarily, subsidies are financial assistance granted to certain industries by the federal government in order to make product and service costs as affordable as possible while also encouraging the development and use of such products and services.

2. Consumption subsidy

This occurs when the government provides financial assistance to cover the costs of food, education, healthcare, and water.

3. Export subsidy

A well-known truth is that a country or state makes money from its exports, and that exports contribute to the overall health of the economy. As a result, the government subsidizes the cost of exports in order to encourage them. However, this may be readily misused, particularly by exporters who inflate the cost of their goods in order to earn a higher incentive, so increasing their profits at the expense of taxpayers and ultimately rising their overall profits.

4. Employment subsidy

This tax credit is provided by the government to businesses and organizations in order to encourage them to create additional job possibilities for their employees.

Advantages of Subsidies

They are particularly useful in the area of production cost inputs such as fuel costs, which is particularly relevant at a time when global crude oil prices are on the rise. Fuel expenses are heavily subsidized in many nations in order to keep prices from skyrocketing.

2. Preventing the long-term decline of industries

There are several businesses that should be maintained alive and functional, such as fishing and farming, because they are critical to the survival of a society’s inhabitants. Many emerging and rapidly expanding sectors may also benefit from government support.

3. A greater supply of goods

Governments strive to expand the availability of goods and services to its citizens, such as water, food, and education, among other things. The incentive they give might be in the shape of a tax credit or even in the form of cash directly to the customer. Markets with positive externalities are those that are profitable. Externality An externality is a cost or benefit of an economic activity that is experienced by a third party that is not involved in the economic activity. Those who do not bear the external cost or advantage are typically the ones who profit from such benefits.

Disadvantages of Subsidies

Despite the fact that one of the benefits of subsidies is an increased supply of products, a scarcity of items can also emerge as a result of subsidies. This is due to the fact that decreased pricing might result in a rapid increase in demand, which many companies may find extremely difficult to satisfy. In the end, it might result in a significant increase in demand, which in turn produces a rise in prices.

2. Difficulty in measuring success

Most of the time, subsidies are useful and beneficial. However, if the government were to publish a report on the success it has had in utilizing subsidies, the story would be quite different. This is due to the fact that it is difficult to assess the effectiveness of subsidies.

3. Higher taxes

Subsidies are frequently useful and beneficial. When it comes to reporting on the success of the government’s use of subsidies, however, the picture is quite different. For one thing, determining the effectiveness of subsidies is difficult to determine.

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  • Loss of Deadweight Loss of Deadweight In economics, deadweight loss refers to the reduction in economic efficiency that occurs when the ideal level of supply and demand is not reached. To put it another way, it is
  • Supply and demand are two sides of the same coin. Supply and demand are two sides of the same coin. The rules of supply and demand are microeconomic ideas that assert that in efficient markets, the amount of an item provided and the quantity demanded are equal. Externality Externality An externality is a cost or benefit of an economic activity that is experienced by a third party that is not involved in the economic activity. Although the external cost or benefit is not included, The Influence of a Network The Influence of a Network Generally speaking, the Network Effect is a phenomena in which current consumers of a product or service gain in some manner when the product or service is adopted by more users. Several users contribute to the creation of this impact when they bring value to their use of a particular product. In the case of the Internet, it is the greatest and most well-known example of a network effect.

What Are the Major Federal Government Subsidies?

Many industries are subsidized by the United States government. Photograph courtesy of Robin Jareaux/Getty Images The vast majority of government subsidies come in the form of cash grants or loans to enterprises. It encourages the participation in activities that the government desires to promote. The amount of the subsidy is determined by the value of the products or services given. Subsidies can be provided by one level of government to another level of government. This covers federal funds made to state or local governments, as well as state grants made to municipalities and school districts.

According to the definition, a subsidy is any financial benefit granted by the government that provides an unfair advantage to a certain sector, firm, or even individual.

  1. Subventions in the form of cash, such as the grants described above
  2. Tax breaks, such as exemptions, credits, and deferrals are available. Risk-bearing arrangements, such as loan guarantees
  3. Purchase policies adopted by the government that pay a premium above the free-market price
  4. Acquisition of stock in order to keep a company’s stock price higher above the market average
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All of them are seen as subsidies since they lower the cost of conducting business in some way.

Farm Subsidies

Getty Images (Photo courtesy of Elly Lange). Many analysts believe that American farmers don’t even require government assistance. After all, they are situated in one of the most advantageous geographical zones on the planet. Rich soil, plentiful rainfall, and access to rivers for irrigation when the rains don’t come are all advantages of this region. Farms now enjoy all of the advantages of running a contemporary company. They have highly qualified workers, sophisticated equipment, and cutting-edge chemical research in the fields of fertilizers and seeds on their side of the fence.

  1. Actually, agricultural subsidies were originally established to assist farmers who had been devastated by the Dust Bowl and the Great Depression of 1929.
  2. The federal government ensured that farmers would get a price that was high enough for them to stay profitable.
  3. It compensated farmers in order to ensure that supply did not exceed demand.
  4. It also purchased any surplus crops.
  5. The majority of the subsidies went to grain producers who grow crops such as maize, wheat, and rice.
  6. By 1999, farm subsidies had reached an all-time high of $22.5 million dollars.
  7. Approximately 15 percent of this was deemed inefficient, unneeded, or repetitive.

More than 6 percent of this amount was spent on four “junk food” ingredients: corn syrup, high-fructose corn syrup, corn starch, and soy oils, among others.

“Do maize producers require government subsidies?” several politicians wondered during the recession as they sought for ways to slash the federal budget.

Corn was anticipated to be grown on 94 million acres in 2012, according to the USDA.

By 2017, huge farms controlled the majority of the industry.

That was the case for only 4% of all farm operations.

In order to produce more food for a lower price, they depended on economies of scale.

Farm subsidies, including the $5 billion direct payment scheme, were planned to be decreased by 22 percent in the 2012 federal budget.

The richest 10 percent of farmers got 77 percent of all agricultural subsidies between 1995 and 2016.

The Deline Farms Partnership, which got $4 million in 2016, was the most generous of the 2016 recipients.

The House budget also suggested $180 billion in changes to the agriculture subsidy program, which would be implemented in the next fiscal year. Instead of farmers, the food stamp program was hit with a $133 billion budget decrease, hitting 8 million customers rather than farmers.

Oil Subsidies

(Image courtesy of David McNew / Getty Images.) Obama advocated for the abolition of the $4 billion in oil sector subsidies in March 2012, and the administration agreed. According to some estimates, the true quantity of oil sector subsidies is greater, ranging between $10 and $40 billion per annum. Profits from the oil industry increased at the same time as oil prices hit a record high of $145 per barrel in 2008. Subsidies to the oil sector have a lengthy history in the United States of America.

The Deep Water Royalty Relief Act, passed by Congress in 1995, provides compensation for deep water royalties.

Since oil was just $18 a barrel at the time, this supported the costlier manner of extraction.

It asserted that this may no longer be necessary now that deepwater extraction has shown to be economically beneficial.

  • Tax Breaks for Volumetric Ethanol Excise Tax Credit – $31 billion
  • Intangible Drilling Costs – $8.9 billion
  • Oil and Gas Royalty Relief – $6.9 billion
  • Percentage Depletion Allowance – $4.327 billion
  • Refinery Equipment Deductions – $2.3 billion
  • Geological and Geophysical Costs Tax Credit – $698 million
  • Ultradeepwater and Unconventional Natural Gas and other Petroleum Resources R D – $230

Greenpeace says that oil industry subsidies should also cover the following activities in addition to drilling for oil:

  • The Strategic Petroleum Reserve
  • Defense expenditures that include military operations in oil-rich nations in the Persian Gulf
  • And other such expenditures The building of the federal highway system in the United States, which favors the use of gas-powered automobiles

These federal government operations, according to the Bureau of Economic Analysis (BEA), are being carried out in order to defend national security rather than to promote specific activities within the oil business. Even while the intention was not to explicitly support the industry, it is possible that they did so inadvertently assist it.

Ethanol Subsidies

Costco members may fill up their petrol tanks at the gas stations operated by the wholesale corporation. Orjan F. Ellingvag/Dagens Naringsliv/Corbis/Getty Images contributed this photo. Between 1979 and 2010, the maize business got federal subsidies totaling $20 billion. The United States Congress desired to convert output towards ethanol, which is a component of gasoline. The incentives were intended to assist producers in meeting the requirements of a 2005 federal law that mandated the production of 7.5 billion gallons of renewable fuel by 2012.

  • In 2011, just 6.25 billion gallons of gasoline were produced.
  • Producers of ethanol would have preferred to see a bigger credit of $1.10 per gallon of ethanol remain in place.
  • When the corn subsidies expired in 2012, ethanol producers were left with a bit of an excess of product on their hands.
  • After a while, the surplus was absorbed.
  • Growing markets, such as Brazil, were unable to keep up with the demand for ethanol in their own countries.
  • When the practice of converting grain into gasoline became contentious in 2008, it was attributed to the rise in food costs.
  • That was only one of the factors contributing to the high price of corn and other commodities.
  • The use of corn as fuel, according to many experts, is a bad use of natural resources at a time when 60 percent of the world’s population is hungry.

Even if all of the maize grown in the United States were turned to ethanol, it would only be enough to supply 4 percent of the country’s total energy requirements. (For more information, see “Ethanol Subsidy Ends, But There’s More,”, December 29, 2011.)

Housing Subsidies

(Image courtesy of Justin Sullivan / Getty Images.) Subsidies for housing encourage homeownership while also assisting the building sector. They generate around $15 billion in revenue every year. Interest rate subsidies and down-payment assistance are the two types of housing subsidies available. The mortgage interest deduction on federal income taxes is the most significant source of interest rate subsidies. There are also some minor interest discounts available to help low-income families lower their monthly mortgage payments.

  • In 2008, this amount amounted to $10.9 million.
  • When compared to the amount of money the federal government spent to maintain its Federal Housing Administration mortgage loan guarantee program, these direct homeowner subsidies paled in comparison.
  • Fannie Mae and Freddie Mac served as a secondary market for the purchase of these mortgages from financial institutions.
  • As a result, the federal government was compelled to spend up to $100 billion to bail out Fannie and Freddie Mac.
  • Was the bailout a subsidy in disguise?
  • If not for it, there would have been no housing activity at all in the aftermath of the subprime mortgage meltdown.
  • In the United States, the agencies took over the function that had previously been played by the private sector in the home mortgage market.

Other Subsidies

The Cash for Clunkers program provided financial assistance to automobile buyers and assisted in the growth of new car sales. (Image courtesy of Bill Publiano / Getty Images.) The federal government of the United States provides a plethora of subsidies that it believes would benefit the economy. According to the Bureau of Economic Analysis, the Cash for Clunkers program in 2009 provided a subsidy to automobile dealers. A federal subsidy of up to $4,500 was made available to dealers that offered a discount on a new vehicle to customers who traded in an old one.

The purpose was to jump-start the economy after it had been hit by a severe downturn.

Obamacare Subsidies

Subsidies from the Affordable Care Act benefit middle-income households. Image courtesy of Getty Images More than half of the Obamacare subsidies are intended to be distributed to middle-income families and individuals. These are parents who put forth a lot of effort. They serve as food service employees, administrative personnel, and health aides, among other occupations. In addition, these are jobs that do not provide health insurance. Despite the fact that 10.6 million Americans were eligible for subsidies as of February 2018, the vast majority did not receive them.

This is due to the fact that they did not sign up for insurance through the exchanges.

Between 2015 and 2024, it is projected that Obamacare would spend $1.039 trillion on subsidies for these middle-class working families, according to the budget. Medicaid expansion and the Children’s Health Insurance Program for the poor are expected to account for just $792 billion of the total.


When a government grants a subsidy, it is either a direct payment or an indirect payment in the form of an economic concession or privilege to private businesses, families, or other government-sponsored entities in order to achieve a public aim. The identification of a subsidy is sometimes difficult due to the wide range of subsidy instruments available, the diversity of the aims they are intended to serve, and the complexity of their impact on the economy. Various government-sponsored programs in the areas of transportation, housing, agriculture, mining, and other sectors have been established on the basis that the maintenance or extension of these businesses, even at the expense of the general population, is in the public’s interest.

  1. Grants of money or other assistance granted by a central government to a local authority in order to achieve objectives in which the central government has an interest are also included in this definition (e.g.,grants-in-aid).
  2. It doesn’t matter what shape subsidies take; their goal is always the same: to shift the outcomes of otherwise free markets and unhindered competition in a direction that is more compatible with the aims of public policy.
  3. Subsidies have been around for a long time in all countries.
  4. Many people have expressed doubt about protectionist theories in the past.
  5. A comprehensive economic planning system takes the role of the subsidy device in countries where the central government exerts significant control over the pricing and production practices of domestic companies.
  6. Aside from that, there are a variety of government measures that have subsidy effects, such as regulatory statutes that soften the full force of competition, rules that compel the purchase of goods fromfavored manufacturers or countries, and protective wage and price legislation.
  7. Direct subsidies have historically been the most extensively employed method of promoting the development of the transportation sector in general.

Indirect subsidies are created when governments purchase directly from private producers at prices that are higher than the market price, maintain higher prices through market manipulation, provide services to private enterprises at prices that are lower than the cost of providing the service, or grant special tax concessions to businesses.

Furthermore, they may serve to support the survival of inefficient producers.

It is necessary to weigh the advantages of a subsidy (which are typically diffuse and difficult to quantify) against the costs of the subsidy, which include increased prices, higher taxes, and inefficiency to determine whether or not the subsidy is desirable.

What Are Subsidies? – IMF Finance & Development Magazine

Some government subsidies make sense, but there are often unintended consequences. Benedict J. Clements and Ian Parry are co-authors of the book Owners of electric vehicles in Norway are exempt from paying tolls on public highways. When businesses recruit young people, indigenous Australians, or senior workers in Australia, the government contributes a portion of their earnings to the company. Companies locating their worldwide or regional headquarters in Singapore might take advantage of tax benefits offered by the government.

  1. Subsidies come in all shapes and sizes.
  2. They may provide services at a lower cost than the market rate, such as a university degree or a subway fare.
  3. Alternatively, they may give exemptions from taxation on specific items or technology.
  4. Using them to fix so-called market imperfections, i.e.
  5. Examples of this include tax breaks that encourage firms to engage in research and development that helps not only their own company, but also the whole industry or society.
See also:  What Does A Subsidy Do?

Impact on inequality

However, there are certain disadvantages. Take, for example, energy subsidies, which are frequently designed to assist low-income households. It is possible that they will become a drain on government resources if they are made available to everyone, including those who are quite well-off. A targeted cash handout to low-income households would be far less expensive. Subsidies can also aggravate inequality if they benefit those who produce or consume the most in a disproportionately large amount.

  1. Another disadvantage is that subsidies that do not address market imperfections might cause pricing distortions, resulting in a misallocation of scarce labor and capital, which can be detrimental to economic progress.
  2. Subsidies to farmers in agriculture, which raise the prices they get over and above the prices of imported food goods, also lower the incentives for farmers to improve their efficiency.
  3. Some subsidies, such as those for fossil fuels, can be hazardous to the environment.
  4. Energy can be regarded subsidized in a wide sense if the price of energy does not completely represent not just the expenses of production, but also the whole spectrum of environmental consequences.

These subsidies are widespread across the world, in both developed and developing countries. China received the most subsidies, amounting to $2.3 trillion, followed by the United States, which received $700 billion, and Russia and India, each of which received around $300 billion.

Reform strategies

It can be difficult to sell subsidy reform since it frequently entails raising the pricing of items, such as fuel or food, which has a direct impact on consumers’ wallets and wallets. Many initiatives to reduce damaging subsidies have been halted or overturned as a result of pressure from interest groups and the general public. In order to achieve these goals, governments must develop a thorough and detailed reform plan that outlines clear long-term objectives for future pricing pathways and the use of revenues (Clements and others, 2013).

A gradual approach to reform, which gives consumers and businesses time to acclimate, may be beneficial.

Even though reforming subsidies is difficult, several nations (particularly energy-producing ones) have managed to boost domestic prices in recent years, including Angola, Egypt, India, Mexico, and Saudi Arabia, despite the fact that reforming subsidies is difficult.



Benedict J. Clements, David Coady, Stefania Fabrizio, Sanjeev Gupta, Trevor Alleyne, and Carlo A. Sdralevich collaborated on this work. 2013. Restructuring the Energy Subsidy System: Lessons and Implications, The International Monetary Fund is based in Washington, DC. David Coady, Valentina Flamini, and Louis Sears are the authors of this work. “The Unequal Benefits of Fuel Subsidies Revisited: Evidence for Developing Countries,” a paper published in 2015. In Inequality and Fiscal Policy, edited by Benedict Clements, Ruud de Mooij, Sanjeev Gupta, and Michael Keen, the authors discuss the relationship between inequality and fiscal policy.

David Coady, Ian Parry, Louis Sears, and Baoping Shang collaborated on this project.


The opinions expressed in articles and other materials are those of the authors and do not necessarily reflect the views of the International Monetary Fund.

Explain why the government might choose to grant a subsidy to producers of wheat. – International Baccalaureate Economics – Marked by

The following are excerpts from this document. Provide a rationale for why the government would decide to provide a subsidy to wheat growers. A subsidy is a sum of money that the government gives to a business in exchange for doing business with them. It is possible that the government will opt to support wheat growers for a variety of reasons. Wheat is regarded as a necessary good in many nations, including the United States. As a result, the government would want to see an increase in the consumption of wheat, which may be accomplished by lowering the price of wheat.

  • Continue reading for more information.
  • Wheat, in this situation, might be considered a basic food supply because it is utilized in the manufacturing of other items such as bread and noodles; as a result, the government may decide to provide a subsidy to wheat growers in order to ensure a consistent supply.
  • Continue reading for more information.
  • In exchange for giving a subsidy, the government enables producers to attain reduced unit production costs.
  • In conclusion, the government may decide to provide a subsidy to wheat growers for a variety of reasons.
  • In turn, this will result in both a fall in market price and a rise in market demand.?

Becky Chang is known as H3NTO. Continue reading for more information. The content in the preview above is not formatted in any way. We have a large collection of student-written pieces of work in our International Baccalaureate Economicssection, and this is just one example.

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Subsidies Definition (6 Examples and 2 Types) – BoyceWire

Written by Paul Boyce and last updated on October 31, 2020 Generally speaking, subsidies are a method through which governments provide money to private companies in order to keep prices low or to safeguard the business and its employees. This might be accomplished by a monetary contribution or through a specific tax reduction. Subsidies are classified into two categories: direct subsidies and indirect subsidies. Direct payments, for example, are made when the government distributes money directly to a company’s account.

Direct subsidies such as government-backed loans or ‘payments in kind’ might be considered to be a sort of indirect subsidy.

  1. Paid by the government to safeguard jobs and/or keep the prices of final goods low, subsidies are a type of aid. Subsidies are classified into two categories: indirect and direct. When it comes to subsidies, critics point out that they are an inefficient use of resources and that they might lead to perverse incentives — as in the case of dairy production in the United States.

The term “direct subsidy” refers to a situation in which the government makes a payment to a party without any goods or services being exchanged. Payment is made as a result, but no compensation is received by the government. Direct subsidies can involve payments to commercial firms as well as payments to low-income individuals and families. As a result, housing assistance or food vouchers for low-income households, as well as payments to private companies in the form of “cash in the bank,” might be included.

Consider the fact that government-backed loans may be thought of as a sort of subsidy.

In a nutshell, direct subsidies are payments made to third parties in the form of cash.

Generally speaking, subsidies are payments made by the government to private organizations in order to keep them in business and safeguard employment.

Agriculture is one of the most heavily subsidized industries in the world, accounting for around a quarter of all subsidies.

The funds involved are significant, with the United States subsidizing the sector to the tune of $20 billion per year on average.

Historically, we may trace the need for such safeguards back to the devastating World Wars that happened in the last century.

Governments are providing financial incentives for environment-friendly alternatives such as electric vehicles in response to the prevalence of climate change.

The goal is to lessen reliance on gasoline and diesel and transition toward a more environmentally friendly option.

A survey by the International Monetary Fund indicated that the largest subsidies were supplied by China ($1.4 trillion), the United States ($649 billion), Russia ($551 billion), and the European Union ($289 billion).

In fact, despite the trend toward green energy, there are millions of employment that are still reliant on the usage of fossil fuels.

As a result, the majority of governments in the industrialized countries offer some form of assistance to the business.

Steel is yet another example of a sector that is reliant on government subsidies — mostly in order to defend and sustain national security and defense capabilities.

However, it is also an important component for numerous businesses, including manufacturing.

The majority of wealthy countries provide subsidies to railway and bus companies.

In addition, subsidies for the purchase of new automobiles have been offered on an irregular basis.

Because it is directed directly to customers, it is a slightly different form of subsidy.

Welfare payments may not appear to be a subsidy at first glance, yet they are classified as such since money is being distributed without any transaction taking place.

For every positive effect that a subsidy has, there is an equal and opposite negative consequence that occurs.

Subsidies such as housing assistance or unemployment compensation can help the poor get out of poverty.

Student loans backed by the government, for example, might result in a more educated workforce.

Such subsidies may be costly to the government in the near term, but they have the potential to pay for themselves in the long run through increased economic development and tax income.

The result of this growth in production is an excess of supply, which has caused suppliers to lower their prices, which in turn has the potential to stimulate demand.

To provide an example, governments often regard steel manufacturing to be a requirement for national defense, and as a result, they attempt to safeguard it against lower-priced foreign competitors.

By subsidizing a certain industry, the government may drive demand in that direction.

Because it is less expensive for the user to use than a vehicle or motorcycle, they are more inclined to do so.

Supporting the industrial sector and, consequently, the employment that are linked with it can assist to prevent its demise.

These subsidies are frequently necessary in the long run since the sector may be subjected to cost and price pressures from more efficient foreign competition.

Even if greater taxes are required, is the end outcome and benefit worth the additional expense and effort?

It is asserted that social assistance such as housing and unemployment might lead to a state of reliance in some people.

This might be interpreted as a failure of the government.

When a government provides a subsidy, it diminishes the incentives to reduce costs and increase efficiency.

Agriculture subsidies, for example, might produce unintended consequences.

Because of this, they may produce whatever much dairy they want, and the government will purchase any extra.

One of the most underappreciated consequences of subsidies is the increase in taxation.

This may be in the near term, or it could be in the long term if it is financed by debt.

This is due to the fact that those who profit from it are deliberately encouraged to lobby government officials in order to keep it in place.

Some have major negative effects, while others have some beneficial effects.

In economics, subsidies are provided by the government to correct market failures.

The government believes that there is a shortage of demand in certain areas, such as college and university education.

College graduates have a better depth of knowledge and, as a result, are more valuable to businesses.

Student loans are extremely hazardous, so students would either have to pay exorbitant interest rates or would be denied access to education altogether.

Therefore, governments give financial guarantees to stimulate private investment and the enrollment of students in postsecondary education.

Despite the fact that government subsidies may be beneficial in certain cases, they frequently have unforeseen consequences.

In turn, property developers are disincentivised from developing rental units as a result of this.

What are the various types of subsidies available?

There is no exchange of goods or services in the case of a direct subsidy, in which the government makes a payment directly to the person receiving the payment.

Is it possible to give examples of government subsidies?

Transportation 2. Renewable Energy Agriculture and fossil fuels are the third and fourth items on the list. Welfare Payments (No. 5) 6. Automobiles that run on electricity What exactly is a subsidy? To put it simply, a subsidy is money that the government gives to private businesses.

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