Subsidy Programs and Financing

Subsidies are an example of government benefit that could take the form of cash payments, tax breaks and low-interest loans that are guaranteed. Subsidies are aimed at achieving an economic goal or a political or a social objective. However, subsidies may create negative effects and reduce the effectiveness of public spending.

Substitutes are a type of reverse taxes, in that they offer businesses or individuals funds to engage in an activity instead of charging them to do so (for example, tax incentives and free student loans). Governments typically provide subsidies for products or activities according to their economic and environmental benefits.

For instance, governments could help to finance the production of renewable energy by offering tax breaks to encourage its use and requiring utilities to purchase it. Also, they can help subsidize housing by offering a loan or grant that will cover a portion of the cost of renting or buying an apartment, allowing more people to afford living in a location they would not otherwise be able to afford.

Subsidy programs have a variety of objectives, but they usually, they are designed to help achieve a national strategic goal or gain an advantage on international markets. In other cases they are designed to counter structural or natural weaknesses within the local economy. For instance, subsidies for producers in agriculture can help support farmers’ prices above the prices of imported food. These kinds of subsidies can alter market prices and cause misallocation of scarce resources.

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