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A subsidy is a form of financial aid or support extended to an economic sector (or institution, business, or individual) generally with the aim of promoting economic and social policy.[1] Although commonly extended from Government, the term subsidy can relate to any type of support - for example from NGOs or implicit subsidies. Subsidies come in various forms including: direct (cash grants, interest-free loans) and indirect (insurance, low-interest loans, depreciation write-offs, rent rebates).[2][3]

Furthermore, they can be broad or narrow, legal or illegal, ethical or unethical. The most common forms of subsidies are those to the producer or the consumer. Producer/Production subsidies ensure producers are better off by either supplying market price support, direct support, or payments to factors of production.[1][1] Consumer/Consumption subsidies commonly reduce the price of goods and services to the consumer. For example, in the US at one time it was cheaper to buy gasoline than bottled water.[4]

Whether subsidies are positive or negative is typically a normative judgment. As a form of economic intervention, subsidies are inherently contrary to the market's demands. However, they can also be used as tools of political and corporate cronyism.

Types of subsidies[edit]

Production subsidy[edit]

A production subsidy encourages suppliers to increase the output of a particular product by partially offsetting the production costs or losses.[2] The objective of production subsidies is to expand production of a particular product more so that the market would promote but without rising the final price to consumers. This type of subsidy is predominantly found in developed markets.[1] Other examples of production subsidies include the assistance in the creation of a new firm (Enterprise Investment Scheme), industry (industrial policy) and even the development of certain areas (regional policy). Production subsidies are critically discussed in the literature as they can cause many problems including the additional cost of storing the extra produced products, depressing world market prices, and incentivising producers to over-produce, such as, for example, a farmer overproducing in terms of his land's carrying capacity.

Consumer/consumption subsidy[edit]


Export subsidy[edit]

An export subsidy is a support from the government for products that are exported, as a means of assisting the country’s balance of payments.[2] Usha Haley and George Haley identified the subsidies to manufacturing industry provided by the Chinese Government and how they have altered trade patterns.[5] Traditionally, economists have argued that subsidies benefit consumers but hurt the subsidizing countries. Haley and Haley provided data to show that over the decade after China joined the World Trade Organization industrial subsidies have helped give China an advantage in industries in which they previously enjoyed no comparative advantage such as the steel, glass, paper, auto parts, and solar industries.[5]

Employment subsidy[edit]


Environmental externalities[edit]

As well as the conventional and formal subsidies as outlined above there are myriad implicit subsidies principally in the form of environmental externalities.[4] These subsidies include anything that is emitted but not accounted for and thus is an externality. These include things such as car drivers who pollute everyone’s atmosphere without compensating everyone, farmers who use pesticides which can pollute everyone’s ecosystems again without compensating everyone, or Britain’s electricity production which results in additional acid rain in Scandinavia.[4][6] In these examples the polluter is effectively gaining a net benefit but not compensating those affected. Although they are not subsidies in the form of direct economic support from the Government, they are no less economically, socially and environmentally harmful.

Categorising subsidies[edit]

Broad and narrow[edit]


Conversely broad subsidies include both monetary and non-monetary subsidies and is often difficult to identify.[6] A broad subsidy is less attributable and less transparent. Environmental externalities are the most common type of broad subsidy.

Economic effects[edit]

Subsidy- visualization.jpg


Subsidy - visualization 2.tiff

Assuming the market is in a perfectly competitive equilibrium, a subsidy increases the supply of the good beyond the equilibrium competitive quantity. The imbalance creates deadweight loss. Deadweight loss from a subsidy is the amount by which the cost of the subsidy exceeds the gains of the subsidy.[8] The magnitude of the deadweight loss is dependent on the size of the subsidy. This is considered a market failure, or inefficiency.[8]

Subsidies, by lowering the price of a good, make national goods more competitive against foreign goods, thereby reducing foreign competition.[9] As a result, many developing countries cannot engage in foreign trade and receive lower prices for their products in the global market. This is considered protectionism: a government policy to erect trade barriers in order to protect domestic industries.[10] The problem with protectionism arises when industries are selected for nationalistic reasons (Infant-Industry), rather than to gain a comparative advantage. The market distortion, and reduction in social welfare, is the logic behind the World Bank policy for the removal of subsidies in developing countries.[7]

Subsidies create spillover effects in other economic sectors and industries. A subsidized product sold in the world market lowers the price of the good in other countries. Since subsidies result in lower revenues for producers of foreign countries, they are a source of tension between the United States, Europe and poorer developing countries.[11] While subsidies may provide immediate benefits to an industry, in the long-run they may prove to have unethical, negative effects. Subsidies are intended to support public interest, however, they can violate ethical or legal principles if they lead to higher consumer prices or discriminate against some producers to benefit others.[9] For example, domestic subsidies granted by individual US states may be unconstitutional if they discriminate against out-of-state producers, violating the Privileges and Immunities Clause or the Dormant Commerce Clause of the United States Constitution.[9] Depending on their nature, subsidies are discouraged by international trade agreements such as the World Trade Organization (WTO).

Perverse subsidies[edit]





Directly, they are expensive to governments by directing resources away from other legitimate priorities (such as environmental conservation, education, health, or infrastructure).[3][6][13][14]


Consumer attitudes do not change and become out-of-date, off-target and inefficient;[4] furthermore, over time people feel a sense of historical right to them.[15] Despite governments being responsible for the creation and (lack of) termination of subsidies, it is ironic that perverse subsidies are not tackled more rigorously, particularly as the above highlight their contradiction to the majority of governments' stated policies.[4]


Perverse subsidies are not tackled as robustly as they should be. Principally, this is because they become ‘locked’ into society, causing bureaucratic roadblocks and institutional inertia.[17][18] When cuts are suggested many argue (most fervently by those ‘entitled’, special interest groups and political lobbyists) that it will disrupt and harm the lives of people who receive them, distort domestic competitiveness curbing trade opportunities, and increase unemployment.[15][19] Individual governments recognise this as a ‘prisoner’s dilemma’ - inasmuch that even if they wanted to adopt subsidy reform, by acting unilaterally they fear only negative effects will ensue if others do not follow.[16] Furthermore, cutting subsidies, however perverse they may be, is considered a vote-losing policy.[17]

Reform of perverse subsidies is at a propitious time. The current economic conditions mean governments are forced into fiscal constraints and are looking for ways to reduce activist roles in their economies.[18] There are two main reform paths: unilateral and multilateral. Unilateral agreements (one country) are less likely to be undertaken for the reasons outlined above, although New Zealand,[20] Russia, Bangladesh and others represent successful examples.[4] Multilateral actions by several countries are more likely to succeed as this reduces competitiveness concerns, but are more complex to implement requiring greater international collaboration through a body such as the WTO.[14] Irrespective of the path, the aim of policymakers should be to: create alternative policies that target the same issue as the original subsidies but better; develop subsidy removal strategies allowing market-discipline to return; introduce ‘sunset’ provisions that require remaining subsidies to be re-justified periodically; and make perverse subsidies more transparent to taxpayers to alleviate the ‘vote-loser’ concern.[4]


Agricultural subsidies[edit]

Support for agriculture dates back to the 19th century. It was developed extensively in the EU and USA across the two World Wars and the Great Depression to protect domestic food production, but remains important across the world today.[14][17] In 2005, US farmers received $14 billion and EU farmers $47 billion in agricultural subsidies.[9] Today, agricultural subsidies are defended on the grounds of helping farmers to maintain their livelihoods. The majority of payments are based on outputs and inputs and thus favour the larger producing agribusinesses over the small-scale farmers.[1][21] In the USA nearly 30% of payments go to the top 2% of farmers.[14]

By subsidising inputs and outputs through such schemes as ‘yield based subsidisation’, farmers are encouraged to: over-produce using intensive methods including using more fertilizers and pesticides; grow high-yielding monocultures; reduce crop rotation; shorten fallow periods; and promote exploitative land use change from forests, rainforests and wetlands to agricultural land.[14] These all lead to severe environmental degradation including adverse effects on: soil quality and productivity including erosion, nutrient supply and salinity which in turn affects carbon storage and cycling, water retention and drought resistance; water quality including pollution, nutrient deposition and eutrophication of waterways, and lowering of water tables; diversity of flora and fauna including indigenous species both directly and indirectly through the destruction of habitats, resulting in a genetic wipe-out.[1][14][22][23]



Today, much of the world's major fisheries are overexploited; in 2002, the WWF estimate this at approximately 75%. Fishing subsidies include "direct assistant to fishers; loan support programs; tax preferences and insurance support; capital and infrastructure programs; marketing and price support programs; and fisheries management, research, and conservation programs."[24] They promote the expansion of fishing fleets, the supply of larger and longer nets, larger yields and indiscriminate catch, as well as mitigating risks which encourages further investment into large-scale operations to the disfavour of the already struggling small-scale industry.[14][25] Collectively, these result in the continued overcapitalization and overfishing of marine fisheries.


The National Football League's (NFL) profits have topped records at $11 billion, the highest of all sports. Attention is beginning to look at the NFL's tax-exemption status[26] and all the stadiums built through tax-free borrowing by the cities, resulting from subsidies out of the pockets of every American taxpayer.[27]


See also[edit]


  2. ^ a b c d "Collins Dictionary of Economics". Retrieved 05/09/2013.  Check date values in: |accessdate= (help)
  3. ^ a b Is That a Good State/Local Economic Development Deal? A Checklist (2014-06-03), Naked Capitalism
  4. ^ a b c d e f g h Myers, N. (1998). "Lifting the veil on perverse subsidies". Nature 392 (6674): 327–328. doi:10.1038/32761. 
  8. ^ a b Watkins, T. (n.d.). "The Impact of an Excise Tax or Subsidy on Price". San José State University Department of Economics. Retrieved 01/04/2013.  Check date values in: |accessdate= (help)
  10. ^ Protectionism. (2006). Collins Dictionary
  12. ^ Myers, N. (1997). "Perverse subsidies". In Costanza, R., Norgaard, R., Daly, H., Goodland, R., and Cumberland, J. An introduction to ecological economics. Boca Raton, Fla.: St. Lucie Press. ISBN 1884015727. Retrieved 03/08/2013.  Check date values in: |accessdate= (help)
  13. ^ James, A.N.; Gaston, K.J.; Balmford, A. (1999). "Balancing the Earth's accounts". Nature 401 (6751): 323–324. doi:10.1038/43774. PMID 16862091. 
  15. ^ a b c van Beers, C.; van den Bergh, J.C.J.M. (2009). "Environmental Harm of Hidden Subsidies: Global Warming and Acidification". AMBIO: A Journal of the Human Environment 38 (6): 339–341. doi:10.1579/08-A-616.1. 
  16. ^ a b van Beers, C.; de Moor, A. (1998). "Perverse subsidies, international trade and the environment". Planejamento e Políticas Públicas 18: 49–69. 
  18. ^ a b Myers, N. (1998). "Consumption and sustainable development: the role of perverse subsidies" (PDF). Background paper for the 1998 Human Development Report: 1–31. 
  20. ^ Myers, N.; Kent, J. (2001). Perverse subsidies: how tax dollars can undercut the environment and the economy. Washington, DC: Island Press. pp. box 3.2. ISBN 1-55963-835-4. 
  21. ^ Steenblik, R. (1998). "Previous Multilateral Efforts to Discipline Subsidies to Natural Resource Based Industries" (PDF). Workshop on the Impact of Government Financial Transfers on Fisheries Management, Resource Sustainability, and International Trade. Retrieved 05/08/2013.  Check date values in: |accessdate= (help)
  23. ^ OECD (2003). "Perverse incentives in biodiversity loss" (PDF). Working Party on Global and Structural Policies Working Group on Economic Aspects of Biodiversity. Retrieved 05/08/2013.  Check date values in: |accessdate= (help)
  25. ^ Porter, G. (1998). "Natural Resource Subsidies, Trade and Environment: The Cases of Forest and Fisheries" (PDF). Center for Environmental Law. Retrieved 05/08/2013.  Check date values in: |accessdate= (help)
  26. ^ Roodman, D. (2005). "Production-weighted Estimates of Aggregate Protection in Rich Countries toward Developing Countries - Working Paper 66" (PDF). Center for Global Development. Retrieved 2013-04-15. 
  27. ^ Cohen, R. (2008). "Playing by the NFL's Tax Exempt Rulesh". NonProfit Quaterly. Retrieved 2013-04-15. 

Further reading[edit]

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