Subsidy Law & Legal Definition

A subsidy is generally a special money payment by a government to one or more firms in a favored industry, usually for the purpose of enabling them to sell one or more of their products at a price below their costs of production, or at least at a price below the free market price. Subsidies are typically advocated either to promote more widespread consumption or production of some favored good or service, or sometimes simply to stave off bankruptcy and unemployment in a declining industry or segment of an industry whose owners and/or workers enjoy a lot of political influence.

An example of a subsidy is a farm subsidy paid annually to farmers by the U.S. Department of Agriculture (USDA).  The most expensive USDA programs are the field crop programs such as the wheat and corn programs. Annually the USDA gives farmers more than $9 billion a year in direct payments. The USDA offers to pay farmers per bushel of commodity at a guaranteed price, invariably set above the market price. Normally this would encourage farmers to overproduce which would lower the price for consumers. However, the USDA has instituted programs to keep the price of commodities as close to the artificially set government price as possible.