Subsidy

Financial support to an economic sector / From Wikipedia, the free encyclopedia

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A subsidy or government incentive is a type of government expenditure for individuals and households, as well as businesses with the aim of stabilizing the economy. It ensures that individuals and households are viable by having access to essential goods and services while giving businesses the opportunity to stay afloat and/or competitive. Subsidies not only promote long term economic stability but also help governments to respond to economic shocks during a recession or in response to unforeseen shocks, such as the COVID-19 pandemic.[1]

Subsidies take various forms— such as direct government expenditures, tax incentives, soft loans, price support, and government provision of goods and services.[2] For instance, the government may distribute direct payment subsidies to individuals and households during an economic downturn in order to help its citizens pay their bills and to stimulate economic activity. Here, subsidies act as an effective financial aid issued when the economy experiences economic hardship.[3] They can also be a good policy tool to revise market imperfections when rational and competitive firms fail to produce an optimal market outcome. For example, in an imperfect market condition, governments can inject subsidies to encourage firms to invest in R&D (research and development). This will not only benefit the firms but also produce some positive externalities such that it benefits the industry in which the firms belong, and most importantly, the society at large.[4]

Although commonly extended from the government, the term subsidy can relate to any type of support – for example from NGOs or as implicit subsidies. Subsidies come in various forms including: direct (cash grants, interest-free loans) and indirect (tax breaks, insurance, low-interest loans, accelerated depreciation, rent rebates).[5][6] 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. [6] 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.[7]

All countries use subsidies via national and sub-national entities through different forms such as tax incentives and direct grants. Likewise, subsidies have an economic influence on both a domestic and international level. On a domestic level, subsidies affect the allocation decision of domestic resources, income distribution, and expenditure productivity. On an international level, subsidies may increase or decrease international interaction and integration through trade.[8] For this reason, having a thorough subsidy policy is essential as its inadequacy can potentially lead to financial hardship and problems for not only the poor or low income individuals but the aggregate economy as a whole.[9]

At large, subsidies take up a substantial portion of the government and economy. Amongst OECD countries in 2020, the median of subsidies and other transfers such as social benefits and non-repayable transfers to private and public enterprises was 56.3 percent of total government expenses which was 34.9 percent (weighted average) of GDP in the same year.[10] Yet, the number of subsidy measures in force have been rapidly increasing since 2008.[11]

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