What is a Subsidy?

What is a Subsidy in Economics?

A subsidy is money or type of benefit given to a business or individual from another organization, usually the government. The payment may be direct or indirect, and the beneficiary will generally use this benefit in a way that will assist the public or economy. Subsidies can be issued for economic, political, and social purposes. They often help the economy balance itself out during financial hardship or uncertainty. Subsidies make up a large portion of the economy and government at large. Learn more about how they work and when they are used.

What Is a Subsidy in Economics?

A subsidy is typically a payment given to an individual for some intended purpose. Unlike charity, subsidies are designed to benefit the economy or the general public. They can be seen as a form of financial aid and are usually issued during economic hardship.

For example, the government may give out direct-payment subsidies to individuals during a recession or depression to help unemployed Americans pay their bills. These payments wouldn’t just keep people in their homes, they would also help stay in the economy, so demand remains concatenate with supply. Without these payments, the recession would likely worsen as more people lose their jobs.

What Is a Government Subsidy?

A government subsidy is a benefit or payment issued by the local, state, or federal government. Many government subsidies are issued by the U.S. Treasury Department, which oversees all spending by the federal government. Local and state governments also distribute subsidies in order to attract and retain business development.

Like all subsidies, those issued by the government are designed to benefit the recipient and the public. They are often given to historically underrepresented industries or groups of people. They may also be issued in response to a growing economic crisis, such as the collapse of a particular industry.

Why Does the Government Do Subsidies?

The government has a responsibility to keep the economy afloat. Economic growth and stability rely on a precise equilibrium of supply and demand. If there isn’t enough product to go around, consumers will see higher prices, which can wipe out their savings. If there isn’t enough demand for existing products, companies will have to spend money to store excess inventory, which is bad for business.

The government can affect supply and demand using subsidies. They may be issued to companies that provide essentials, such as food, transportation, housing, and other necessities to the public to ensure consumers can access the things they need to work and lead a healthy lifestyle.

When demand is low, the government can issue subsidies to individual consumers to increase their purchasing power. Some may save this money or use it to pay off debt, but many people will use it immediately on the things they use every day.

Indirect vs. Direct Subsidy

Subsidies can either be direct or indirect. A direct subsidiary would be cash or immediate payment to a consumer or individual. An indirect subsidiary is a benefit that will help the recipient save money later on, such as tax breaks. The consumer or business will pay for these products and services upfront, but they will get this money back when they file their taxes in the spring.

The Different Types of Subsidies

Export Subsidy

International trade is an integral part of the diplomatic process. An export subsidy is a benefit that encourages exporting goods and services. The subsidy may consist of direct payments, tax breaks, and other incentives to get companies to sell more of their products overseas. A country will use export subsidies to increase trade with another country to develop its relationship further.

Employment Subsidy

An employment subsidy is a benefit designed to increase employment in a particular sector or industry. The government will typically cover most, if not all, of the worker’s salary to lower the company’s operating expenses.

Production Subsidy

A production subsidy is a benefit meant to increase the production of a particular product or service or fundamental necessities. For example, agricultural subsidies are used to improve the supply of food. They often go to farmers who use this money to facilitate production and distribution.

Transportation Subsidy

Transportation is essential in the economy. Building new forms of transportation and increasing the number of routes can help spur economic growth by giving workers access to new job markets. The government will issue transportation subsidies to private contractors to increase the amount of public transportation in a particular area.

How Do Subsidies Affect the Economy?

Subsidies are generally good for the economy. They help restore the balance between supply and demand to keep prices in check while supporting economic growth.

However, the government has to strike the right balance when spending money. Issuing too many subsidies can overheat the economy, leading to inflation. They can also be used for illegitimate purposes, such as gaining political favor with a particular industry or group.

Subsidies have become a cornerstone of modern governance. Keep this information in mind to better understand how these payments can affect the economy.

RELATED CATEGORIES: Macro