Do Subsidies Help the Economy?
Government subsidies can boost the economy, either by paying for part of suppliers' production costs or by boosting demand among consumers for goods and services. Subsidies can take the form of direct aid, tax credits, and reimbursements, among other types of economic support.
A subsidy is often granted by a government to support critical parts of the economy that are thought to be vulnerable to external forces.Key Takeaways
- Subsidies are payments, tax breaks, or other forms of economic support given by governments to certain industries or economic sectors.
- The goal of subsidies is to aid or support what are deemed to be key parts of the economy or national infrastructure.
- While subsidies may have a direct positive impact on the particular industry or companies involved, economists argue that subsidies work against free trade and create market inefficiencies.
Effect of Subsidies on Supply
Governments implement subsidies to encourage production and consumption in specific industries. When government subsidies are implemented on the supplier side, producers can produce more goods and services. This increases the overall supply, which increases the quantity demanded and lowers the overall price.
In this sense, when the government gives subsidies to suppliers, what results is a win-win situation for both producers and consumers. Essentially, suppliers benefit to the same extent as if the goods and services were selling at higher prices, and are able to produce more. Meanwhile, consumers get to enjoy subsidized products for relatively cheaper prices.The government often helps suppliers through tax credits or reimbursements.
Effects of Subsidies on Demand
On the consumer side, government subsidies can also help potential consumers afford goods or services, usually through tax credits. A great example of this can be found in the transition to more renewable sources of energy. With still nascent models of green economics, the current demand to purchase new energy-saving technology is low. In order to sway consumer interest, government subsidies or tax credits may help lower an otherwise high cost of adoption. When consumers refit their houses with solar panels, the government provides tax credits to individuals and families to offset their high purchase price. In this sense, consumer-targeted subsidies will not necessarily immediately increase supply, since producers aren't being directly motivated or compensated to produce more. However, tax credits can offset higher prices for consumers, while ensuring that profit margins still go back to producers. In the long-run, subsidies can sustain and stabilize demand, incentivizing producers to produce more.In the same vein, some states also provide a tax credit or subsidy for buying an electric or hybrid vehicle. This helps the renewable energy industry by allowing more consumers to purchase the products associated with that industry, without having to absorb their entire cost.