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Encyclopedia > Subsidy

In economics, a subsidy (also known as a subvention) is a form of financial assistance paid to a business or economic sector. A subsidy can be used to support businesses that might otherwise fail, or to encourage activities that would otherwise not take place. Image File history File links Unbalanced_scales. ... Face-to-face trading interactions on the New York Stock Exchange trading floor. ...


Subsidies can be 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.[1] Protectionism is the economic policy of restraining trade between nations, through methods such as high tariffs on imported goods, restrictive quotas, a variety of restrictive government regulations designed to discourage imports, and anti-dumping laws in an attempt to protect domestic industries in a particular nation from foreign take-over... A trade barrier is general term that describes any government policy or regulation that restricts international trade, the barriers can take many forms, including: Import duties Import licenses Export licenses Quotas Tariffs Subsidies Non-tariff barriers to trade Most trade barriers work on the same principle: the imposition of some...


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, although these would be more commonly described as charity. Allegorical personification of Charity as a mother with three infants by Anthony van Dyck // The word charity entered the English language through the O.Fr word charite which was derived from the Latin caritas.[1] In Christian theology charity, or love (agapē), is the greatest of the three theological virtues...

Contents

Overview

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 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 demanding their share of benefits may still rise and drive costs up. The supply and demand model describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). ... Price of market balance In economics, economic equilibrium is simply a state of the world where economic forces are balanced and in the abscence of external shocks the (equilibrium) values of economic variables will not change. ... In economics, elasticity is the ratio of the proportionate change in one variable with respect to proportional change in another variable, such as the responsiveness of the price of a commodity to changes in market demand or visa-versa. ... Look up Total on Wiktionary, the free dictionary A total is a sum. ... Market price is an economic concept with commonplace familiarity; it is the price that a good or service is offered at, or will fetch, in the marketplace; it is of interest mainly in the study of microeconomics. ... In economics, a public good is a good that is non-rival and non-excludable. ...


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 subset of consumers, such as low-income households); but if supply of milk is constrained and results in higher demand and higher prices, the milk producer may benefit and the consumer may derive no net 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. Although economics generally holds that subsidies may distort the market and produce inefficiencies, there are a number of recognized cases where subsidies may be the most efficient solution.[citation needed]


In many instances, economics may (somewhat counter-intuitively) suggest that direct subsidies are preferable to other forms of support, such as hidden subsidies or trade barriers; although subsidies may be inefficient, they are often less inefficient than other policy tools used to benefit certain groups. Direct subsidies may also be more transparent, which may allow the political process more opportunity to eliminate wasteful hidden subsidies. This problem - that hidden subsidies are more inefficient, but often favored precisely because they are non-transparent - is central to the political-economy of subsidies.


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. A public utility is a company that maintains the infrastructure for a public service. ... Petrol redirects here. ... This article is about financial assistance paid by government organizations. ... An agricultural subsidy is a governmental subsidy paid to farmers to supplement their income, help manage the supply of agricultural commodities, and bolster the supply of such commodities on international markets. ... This article needs cleanup. ...


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 not 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. In linguistics, prescription is the laying down or prescribing of normative rules of the language. ... In linguistics, prescription is the laying down or prescribing of normative rules for a language. ... Market failure is a term used by economists to describe the condition where the allocation of goods and services by a market is not efficient. ...


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 good, 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. Did you mean? decal Population transfer Manhattan Transfer List of Latin words with English derivatives Transfer (movie) Electron transfer Fare transfer A technique in propaganda This is a disambiguation page — a navigational aid which lists other pages that might otherwise share the same title. ...


Economics has also explicitly identified a number of areas where subsidies are entirely justified by economics, particularly in the area of provision of public goods.


Direct subsidies

Direct subsidies are the most simple, and arguably the least frequently used[citation needed]. They involve a direct cash transfer to the recipient, for example an unemployed person or an agricultural corporation.


Indirect Subsidies

Indirect subsidy is a term sufficiently broad that it may cover most other forms of subsidy. The term would cover any form of subsidy that does not involve a direct transfer.


Labor subsidies

A labor subsidy is any form of subsidy where the recipients receive subsidies to pay for labor costs. Examples may include labor subsidies and tax deductions for workers in industries, such as the film and/or television industries. (see: Runaway production) A tax deduction or a tax-deductible expense represents an expense incurred by a taxpayer that is subtracted from gross income and results in a lower overall taxable income. ... The current version of this article or section advances a limited or personal interpretation of the subject matter. ...


Tax Subsidy

A tax subsidy is any form of subsidy where the recipients receive the benefit through the tax system, usually through the income tax, profit tax, or consumption tax systems. Examples may include tax deductions for workers in certain industries, accelerated depreciation for certain industries or types of equipment, or exemption from consumption tax (sales tax or value added tax). Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank   Money supply Fiscal policy Spending   Deficit   Debt Trade policy Tariff   Trade agreement Finance Financial market Financial market participants Corporate   Personal Public   Banking   Regulation        An income tax is a tax levied on the financial income... Profit tax in Hong Kong is Direct tax and also classified into Income tax. ... A consumption tax is a tax on the purchase of a good or service. ... A tax deduction or a tax-deductible expense represents an expense incurred by a taxpayer that is subtracted from gross income and results in a lower overall taxable income. ... Accelerated depreciation refers to allowing a company to depreciate an asset (such as a unit of machinery) at a higher-than-normal rate, thus reducing taxes payable. ... A tax exemption is an exemption to the tax law of a state or nation in which part of the taxes that would normally be collected from an individual or an organization are instead foregone. ... A sales tax is a consumption tax charged at the point of purchase for certain goods and services. ... Economic policy Monetary policy Central bank   Money supply Gold standard Fiscal policy Spending   Deficit   Debt Policy-mix Trade policy Tariff   Trade agreement Finance Financial market Financial market participants Corporate   Personal Public   Regulation Banking Fractional-reserve Full-reserve   Free banking Islamic        Value added tax (VAT), or goods and services tax (GST...


Perverse subsidies

The term "perverse" is sometimes applied to a subsidy when it encourages undesirable actions imposing social costs upon the rest of society. Social cost, in economics, is the total of all the costs associated with an economic activity. ...


Production subsidies

In certain cases (to encourage the development of a particular industry, for example), governments may provide direct production subsidies - cash payments for production of a given good or service. Frequently, production subsidies are easily identifiable, such as minimum price policies. Indirect production subsidies may be less easy to identify, such as infrastructure subsidies.


Regulatory advantages

Policy may directly or indirectly favour one industry, company, product, or class of producer over another by means of regulations. For example, a requirement that full-time government inspectors (at company expense) be present to inspect meat may favor large producers; conversely, if small producers were not required to undergo meat inspections at all, this may constitute a subsidy to that class of producer. It may not be evident or clear that there is a subsidy in many cases.


Infrastructure subsidies

Infrastructure subsidies may be used to refer to a form of indirect production subsidy, whereby the provision of infrastructure (at public expense) may effectively be useful for only a limited group of potential users, such as construction of roads at government expense for a single logging company. The implication is that those users or industries benefit disproportionately from the provision of that infrastructure, at the expense of taxpayers.


In some cases, the "subsidy" may refer to favoring one type of production or consumption over another, effectively reducing the competitiveness or retarding the development of potential substitutes. For example, it has been argued that the use of petroleum, and particularly gasoline, has been "subsidized" or favored by U.S. defense policy, reducing the use of alternative energy sources and delaying their commercial development.


In other cases, the government may need to improve the public transport to ensure pareto improvement is attanied and sustained.This can therefore be done by subsidising those transit agencies that provide the public services so that the services can be affordable for everyone.This is the best way of helping different groups of disabled and low income families in the society .


Trade protection (Import)

Measures used to limit imports from other countries may constitute another form of hidden subsidy. The economic argument is that consumers of a given product are forced to pay higher prices for a given good than they would pay without the trade barrier; the protected industry has effectively received a subsidy. Such measures include import quotas, import tariffs, import bans, and others. An import quota is a type of protectionist trade restriction that sets an upper limit on the quantity of a good that can be imported into a country in a given period of time. ... Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank   Money supply Fiscal policy Spending   Deficit   Debt Trade policy Tariff   Trade agreement Finance Financial market Financial market participants Corporate   Personal Public   Banking   Regulation        For other uses of this word, see tariff (disambiguation). ...


Export subsidies (trade promotion)

Various tax or other measures may be used to promote exports that constitute subsidies to the industries favored. In other cases, tax measures may be used to ensure that exports are treated "fairly" under the tax system. The determination of what constitutes a subsidy (or the size of that subsidy) may be complex. In many cases, export subsidies are justified as a means of compensating for the subsidies or protections provided by a foreign state to its own producers.


Procurement subsidies

Governments everywhere are relatively large consumers of various goods and services. Subsidies may occur in this process by choice of the products consumed, the producer, the nature of the product itself, and by other means, including payment of higher-than-market prices for goods purchased.


Consumption subsidies

Governments everywhere provide consumption subsidies in a number of ways: by actually giving away a good or service, providing use of government assets, property, or services at lower than the cost of provision, or by providing economic incentives (cash subsidies) to purchase or use such goods. In most countries, consumption of education, health care, and infrastructure (such as roads) are heavily subsidized, and in many cases provided free of charge. In other cases, governments literally purchase or produce a good (such as bread, wheat, gasoline, or electricity) at higher prices than the cost of sale to the public (which may require rationing to control the cost). Gasoline ration stamps being printed as a result of the 1973 oil crisis Rationing is the controlled distribution of resources and scarce goods or services. ...


The provision of true public goods through consumption subsidies is an example of a type of subsidy that economics may recognize as efficient. In other cases, such subsidies may be reasonable second-best solutions; for example, while it may be theoretically efficient to charge for all use of public roads, in practice, the cost of implementing a system to charge for such use may be unworkable or unjustified. In economics, a public good is a good that is non-rival and non-excludable. ... Efficient can relate to: Efficiency (and related topics; see link), the technical term often related to energy usage. ...


In other cases, consumption subsidies may be targeted at a specific group of users, such as large utilities, residential home-owners, and others.


Tax breaks and corporate welfare

Main article: Corporate welfare

As previously stated, a common form of subsidy is via a tax break. This is a reduction in the normal rate of a particular class of taxes targeted towards an individual or group of companies. Often this is described as "corporate welfare", although that term is also used as a blanket term for all other forms of subsidies. Larger companies who are planning to open a new factory, for example, shop around for a location which will provide them with the biggest tax breaks in a process called a race to the bottom. Locations provide these tax breaks because they often feel that the benefits of job creation will more than offset the decline in tax revenues. Governments of all levels may do this to encourage employment in under-developed areas. Subsidies are given as protection to smaller producers to help them compete with larger companies, to help correct international trade imbalances, to aid industry deemed critical to national security, and to help industry compete with other countries - due to subsidies being common practice throughout the world. Corporate welfare is a pejorative term, first coined by Ralph Nader in 1956, describing a governments bestowal of grants and/or tax breaks on corporations or other special favorable treatment from the government. ... A tax exemption is an exemption to the tax law of a state or nation in which part of the taxes that would normally be collected from an individual or an organization are instead forgone. ... In government regulation, a race to the bottom is a theoretical phenomenon which occurs when competition between nations or states (over investment capital, for example) leads to the progressive dismantling of regulatory standards. ...


To some, another way that the government subsidizes industry is by failing to regulate externalities. For example, when a company pollutes, it generates savings for itself at public expense, in the form of environmental degradation and public health costs. Thus a cost of production is absorbed by the public. Some individuals argue that this is a form of subsidy of producers (since producers are not paying the full social cost of production). Even where such externalities exist, it is unclear what the most effective way of compensating for the problem is: traditional economic theory suggests that "internalizing" the costs (to the extent possible) is most efficient. It is unclear, however, whether not compensating for externalities (by internalizing costs, regulations, Pigouvian taxes or other means) amounts to a subsidy or not. In economics, an externality is an impact (positive or negative) on anyone not party to a given economic transaction. ... A Pigouvian Tax is a tax on external activities. These activities, called externalities, are actions not taken into account by the acting party. ...


Subsidies due to the effect of debt guarantees

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. Default is the name of a number of quite different concepts. ... The Government National Mortgage Association (GNMA, also known as Ginnie Mae) was created by the United States Federal Government through a 1968 partition of the Federal National Mortgage Association. ... The United States Federal Government created the Federal National Mortgage Association (FNMA) (NYSE: FNM), commonly known as Fannie Mae, in 1938 to establish a secondary market for mortgages insured by the Federal Housing Administration (FHA). ... The Federal Home Loan Mortgage Corporation (Freddie Mac) (NYSE: FRE) is a stockholder-owned, publicly-traded company chartered by the United States federal government in 1970 to purchase mortgages and related securities, and then issues securities and bonds in financial markets backed by those mortgages in secondary markets. ...


Controversy

One of the most controversial classes of subsidies, especially according to publications such as The Economist, are subsidies benefitting farmers in first-world countries. Charity institutions like Oxfam describe such subsidies as dumping millions of surplus commodities (like sugar) on world markets, destroying opportunities for farmers in developing and poor countries, especially in Africa. For example, the EU is currently spending €3.30 in subsidies to export sugar worth €1 Source: Oxfam briefing paper. These subsidies have remained in place even though many international accords have reduced other forms of subsidies or tariffs. The Economist is an English-language weekly news and international affairs publication owned by The Economist Newspaper Ltd and edited in London. ... Farmer spreading grasshopper bait in his alfalfa field. ... The terms First World, Second World, and Third World were used to divide the nations of Earth into three broad categories. ... Oxfam International logo Oxfam International is a confederation of 13 organizations working with over 3,000 partners in more than 100 countries to find lasting solutions to poverty and injustice. ... Wikiquote has a collection of quotations by or about: European Union The European Union On-Line Official EU website, europa. ...


A view, held by Austrian economists and other free-marketers, is that subsidies do, in general, more harm than good by distorting economic signals. The Austrian School is a school of economic thought which rejects opposing economists reliance on methods used in natural science for the study of human action, and instead bases its formalism of economics on relationships through logic or introspection called praxeology. ...


Sometimes people believe profitable companies to be 'bullying' governments for subsidies and rescue packages, an example of rent-seeking behaviour. For example,[citation needed] in the case with Australian rail operator Pacific National, the company threatened the Tasmanian Government with a pull-out of rail services unless a subsidization was made. In economics, rent seeking occurs when an individual, organization, or firm seeks to make money by manipulating the economic environment rather than by making a profit through trade and production of wealth. ... NR Locomotive Pacific National is one of Australias largest private rail freight businesses. ... Tasmanian Coat of Arms featuring two Thylacines The form of the Government of Tasmania is prescribed in its Constitution, which dates from 1856, although it has been amended many times since then. ...


Historical meaning

In the 1500s the subsidy was a tax invented in England by Thomas Wolsey in 1513 that taxed based on the ability to pay. It was created in order that Henry VIII could pay for war with France while maintaining his lifestyle. Cardinal Thomas Wolsey, (c. ... Henry VIII redirects here. ...


Compare

An agricultural subsidy is a governmental subsidy paid to farmers to supplement their income, help manage the supply of agricultural commodities, and bolster the market price of commodities. ... Antidumping is a means to restrict international trade without tariffs. ... The Price-Anderson Nuclear Industries Indemnity Act (commonly called the Price-Anderson Act) is an act of the Congress of the United States. ... underwear is a tool used by a state to restrain international trade to protect a certain home industry from foreign competition. ... A trade barrier is general term that describes any government policy or regulation that restricts international trade, the barriers can take many forms, including: Import duties Import licenses Export licenses Quotas Tariffs Subsidies Non-tariff barriers to trade Most trade barriers work on the same principle: the imposition of some...

Notes and References

  1. ^ Economics A-Z | Economist.com

See also

This article needs to be cleaned up to conform to a higher standard of quality. ... Copenhagen Consensus is a project which seeks to establish priorities for advancing global welfare using methodologies based on the theory of welfare economics. ... Corporate welfare is a pejorative term, first coined by Ralph Nader in 1956, describing a governments bestowal of grants and/or tax breaks on corporations or other special favorable treatment from the government. ... A cultural subsidy is a payment to cultural industries to ensure that some public policy purpose in culture (e. ... The Direct Subsidy Scheme is a system instituted by the Hong Kong Education and Manpower Bureau (a division of the Hong Kong government) as a means to enhance the quality of private schools in Hong Kong at the kindergarten, primary, and secondary levels. ... pollution credits, sometimes called pollution permits or pollution certificates are pollution rights as used in emissions trading. ... In public relations and journalism, information subsidy is what information sources provide the news media by issuing press releases, purchasing advertising, or sending letters to the editor; this relieves the journalists from some burden of collecting information, and shortens the time to publication. ... A mixed economy is an economic system that incorporates aspects of more than one economic system. ... A Pigouvian subsidy is similar to a Pigouvian tax, in which the main issue is to internalize within a firm, or service provider, a positive externality. ... The current version of this article or section advances a limited or personal interpretation of the subject matter. ...

External links

  • Why Congress Should Repeal Sugar Subsidy
  • Ten Reasons to Cut Farm Subsidies by Chris Edwards
  • Oxfam How EU sugar policies hurt poor countries
  • Should the United States Cut Its Farm Subsidies? - Daniel Griswold, director of the Cato Institute’s Center for Trade Policy Studies, and Bob Young, chief economist for the American Farm Bureau, debate whether the United States should be subsidizing its farmers
  • Ripe for Reform: Six Good Reasons to Reduce U.S. Farm Subsidies and Trade Barriers by Daniel Griswold, Stephen Slivinski, and Christopher Preble (September 5, 2005).
  • The Global Subsidies Initiative
  • Farmsubsidy.org
  • Ending Famine, Simply by Ignoring the Exports
  • MONITORING, TRAINING, CONSULTANCY ON EUROPEAN SUBSIDIES AND PUBLIC AFFAIRS
Inter Press Service (abbreviated: IPS) is a global news agency. ... Daniel T. Griswold is director of the Cato Institutes Center for Trade Policy Studies as of March 2005. ... Daniel T. Griswold is director of the Cato Institutes Center for Trade Policy Studies as of March 2005. ... is the 248th day of the year (249th in leap years) in the Gregorian calendar. ... Year 2005 (MMV) was a common year starting on Saturday (link displays full calendar) of the Gregorian calendar. ...

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City of Toronto: Children Services (2484 words)
Fee subsidy is available on a first-come, first-served basis, so plan to apply well in advance of when you need it as there is a waiting list.
You must have filed an income tax return to apply for fee subsidy, unless you are a recent immigrant to Canada and would not yet have filed your first tax return.
Fee subsidy is available only to help you with the cost of child care while you are in an approved activity.
Subsidy - Wikipedia, the free encyclopedia (1088 words)
In economics, a subsidy is generally a monetary grant given by government to lower the price faced by producers or consumers of a good, generally because it is considered to be in the public interest.
Subsidies protect the consumer from paying the full price of the good consumed, however they also prevent the consumer from receiving the full value of the thing not consumed – in that sense, a subsidized society is a consumption society because it unfairly encourages consumption more than conservation.
Subsidies are paid for by taxation which creates a deadweight loss for that activity which is taxed.
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