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Reviewed by Jul 26, 2021| Updated on
A subsidy is a financial advantage or support given to institutions or individuals, generally by the government. This privilege is ordinarily either in the form of cash or a tax cut. It aims to promote the economic and social policies of the government as it raises the general interest of the public.
Subsidies, generally, work as payments provided to the receiving economic sector (enterprises or individuals). The government grants this financial privilege to lessen a related burden levied against the subsidy recipient. There are many forms of Subsidies provided by the authorities including,
Further, they can be broad or narrow, ethical or unethical. The most common kinds of subsidies are the producer or consumer ones. A subsidy is not only a help to the receivers but also the entire nation. Since it fulfils the social and economic commitments of the government, it supports prominent sectors of a country's economy.
These sectors often stay overlooked by general economic policies. Hence, subsidies lend a helping hand to them.
Direct Subsidies are those that involve an actual payment of money towards a specific group or individual. Cash grants and interest-free loans are some examples.
Indirect Subsidies are the ones that do not involve actual cash outlays. They usually include activities that lead to price reduction for goods and services. Hence, the savings arising out of the decrease in prices works as monetary help. Some of the notable examples are tax breaks, insurance, rent rebates, low-interest loans, etc.
Producer Subsidies is a way to ensure that producers are better off. The government gives production subsidies either by providing market price support, direct support or paying for the factors of production. In this way, the authorities secure producers from any unknown decline in their returns.
Consumer Subsidies ordinarily reduce the prices of goods and services in the market. Hence, they give an advantage to the consumers. These subsidies are common in developing countries where the government wants to provide subsidised things as the most basic needs.