Subsidy

A subsidy is an assistance paid to a business or economic sector. Most subsidies are made by the government to producers or distributed as subventions in an industry to prevent the decline of that industry (e.g., as a result of continuous unprofitable operations) or an increase in the prices of its products or simply to encourage it to hire more labor (as in the case of a wage subsidy). Examples are subsidies to encourage the sale of exports; subsidies on some foods to keep down the cost of living, especially in urban areas; and subsidies to encourage the expansion of farm production and achieve self-reliance in food production. Subsidy has been used by economists with different meanings and connotations in different contexts. The dictionary [Concise Oxford] defines it as "money granted by state, public body, etc., to keep down the prices of commodities, etc.”. Environmental economists define subsidies as uncompensated environmental damage arising from any flow of goods and services. In a budgetary context, it may be defined as “unrecovered costs in the public provision of private goods”.

Subsidies are often regarded as a form of protectionism or trade barrier by making domestic goods and services artificially competitive against imports. Subsidies may distort markets, and can impose large economic costs. Financial assistance in the form of a subsidy may come from one's government, but the term subsidy may also refer to assistance granted by others, such as individuals or non-governmental institutions.

Examples of industries or sectors where subsidies are often found include utilities, gasoline in the United States, welfare, farm subsidies, and (in some countries) certain aspects of student loans. Also the fuel subsidy that was removed in Nigeria on January 1st 2012 cause a spike in the price of fuel which all Nigerians were not in support of most especially due to the fact that the minimum wage of an average Nigerian is N18000 (111.697 USD). As a result of the removal of the fuel subsidy, the price of fuel went from N65 (0.403351 USD) per liter to N140 (0.869835 USD) per liter.

Types of subsidies

There are many different ways to classify subsidies, such as the reason behind them, the recipients of the subsidy, the source of the funds (government, consumer, general tax revenues, etc.). In economics, one of the primary ways to classify subsidies is the means of distributing the subsidy. In economics, the term subsidy may or may not have a negative connotation: that is, the use of the term may be prescriptive but descriptive. In economics, a subsidy may nonetheless be characterized as inefficient relative to no subsidies; inefficient relative to other means of producing the same results; "second-best", implying an inefficient but feasible solution (contrasted with an efficient but not feasible ideal), among other possible terminology. In other cases, a subsidy may be an efficient means of correcting a market failure. For example, economic analysis may suggest that direct subsidies (cash benefits) would be more efficient than indirect subsidies (such as trade barriers); this does not necessarily imply that direct subsidies are bad, but that they may be more efficient or effective than other mechanisms to achieve the same (or better) results. Insofar as they are inefficient, however, subsidies would generally be considered by economists to be bad, as economics is the study of efficient use of limited resources. Ultimately, however, the choice to enact a subsidy is a political choice. Note that subsidies are linked to the concept of economic transfers from one group to another.^{[citation needed]}

Another form of subsidy is due to the practice of a government guaranteeing a lender payment if a particular borrower defaults. This occurs in the United States, for example, in certain airline industry loans, in most student loans, in small business administration loans, in Ginnie Mae mortgage-backed bonds, and is alleged to occur in the mortgage-backed bonds issued through Fannie Mae and Freddie Mac. A government guarantee of payment lowers the risk of the loan for a lender, and since interest rates are primarily based on risk, the interest rate for the borrower lowers as well.^{[citation needed]}

Effects

In standard supply and demand curve diagrams, a subsidy will shift either the demand curve up or the supply curve down. A subsidy that increases the production will tend to result in a lower price, while a subsidy that increases demand will tend to result in an increase in price. Both cases result in a new economic equilibrium. Therefore it is essential to consider elasticity when estimating the total costs of a planned subsidy: it equals the subsidy per unit (difference between market price and subsidized price) times the new equilibrium quantity. One category of goods suffers less from this effect: Public goods are—once created—in ample supply and the total costs of subsidies remain constant regardless of the number of consumers; depending on the form of the subsidy, however, the number of producers on demanding their share of benefits may still rise and drive costs up. The recipient of the subsidy may need to be distinguished from the beneficiary of the subsidy, and this analysis will depend on elasticity of supply and demand as well as other factors. For example, a subsidy for consumption of milk by consumers may appear to benefit consumers (or some may benefit and the consumer may derive no gain, as the higher prices for milk offset the subsidy). The net effect and identification of winners and losers is rarely straightforward, but subsidies generally result in a transfer of wealth from one group to another (or transfer between sub-groups). Subsidy may also be used to refer to government actions which limit competition or raise the prices at which producers could sell their products, for example, by means of tariff protection.^{[citation needed]}

History

In the 16th century "subsidy" referred to taxation, for example the tax introduced in England by Thomas Wolsey in 1513 based on the ability to pay.

Recent controversies

Human-rights based non-governmental organizations like Oxfam describe such subsidies as dumping millions of surplus commodities (like sugar) on world markets, destroying competition from farmers in undeveloped and poor countries, especially in Africa. For example, in the past EU spent €3.30 in subsidies to export sugar worth €1. Another example of trade distorting subsidies is the Common Agricultural Policy of the European Union. It represents 48% of the entire EU's budget, €49.8 billion in 2006 (up from €48.5 billion in 2005). These subsidies have remained in place even though many international accords have reduced other forms of subsidies or tariffs.^{[citation needed]}

The Commitment to Development Index, published by the Center for Global Development, measures the effect that subsidies and trade barriers actually have on the undeveloped world. It uses trade along with six other components such as aid or investment to rank and evaluate developed countries on policies that affect the undeveloped world. It finds that the richest countries spend $106 billion per year subsidizing their own farmers - almost exactly as much as they spend on foreign aid.

Some critics argue that American government subsidies are contributing to the country's obesity levels. So-called junk foods are made cheaper due to the subsidy programs, thus increasing consumption of such foods.

See also

• Agricultural policy
• Antidumping
• Copenhagen Consensus
• Cultural subsidy
• Constitutional economics
• Act of Entrustment
• Political economy
• Rule according to higher law

• Direct Subsidy Scheme
• Dirty subsidy
• Information subsidy
• Mixed economy
• Party subsidies
• Pigouvian subsidies
• Price-Anderson Nuclear Industries Indemnity Act
• World Trade Organisation or WTO

External links

• Google - public data: GDP and Personal Income of the U.S. (annual): Subsidies
• Subsidies and (tax) facilities
• World Bank report on Water Utility subsidies