Subsidy

Subsidy

A Subsidy is a form of financial aid or support extended to an economic sector (business, or individual) generally with the aim of promoting economic and social policy. Although commonly extended from government, the term subsidy can relate to any type of support – for example from NGOs or as implicit subsidies. Subsidies come in various forms including: direct (cash grants, interest-free loans) and indirect (tax breaks, insurance, low-interest loans, accelerated depreciation, rent rebates).

Types of subsidies

There are various types of subsidies:

• Direct subsidy: This is the one which is given to improve the competitiveness of a business or sector. It is directly given by the government to the producers.
• Indirect subsidy: This is given to the consumer. The government provides it to the consumers in the form of reduced prices of goods and services.
• Production subsidy: This is given to the producers to encourage production. It can be in the form of cash or kind.
• Consumption subsidy: This is given to the consumers to encourage consumption. It can be in the form of reduced prices or rebates.

Effects of subsidies

Subsidies have a wide range of effects on the economy. They can:

• Increase production: By reducing the cost of production, subsidies can encourage producers to produce more.
• Reduce prices: By reducing the cost of production, subsidies can lead to lower prices for consumers.
• Encourage consumption: By reducing the price of goods and services, subsidies can encourage consumers to consume more.
• Distort markets: Subsidies can distort market outcomes and lead to inefficiencies.

Criticism of subsidies

Subsidies have been criticized for various reasons:

• Market distortion: Subsidies can distort market outcomes and lead to inefficiencies.
• Fiscal burden: Subsidies can put a strain on government finances.
• Inequity: Subsidies can lead to inequity as they may benefit the rich more than the poor.

See also

• Government spending
• Public finance
• Taxation

Subsidy Resources
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