The effects of a government subsidy (defined by Webster 1913 as "A grant from the government, from a municipal corporation, or the like, to a private person or company to assist the establishment or support of an enterprise deemed advantageous to the public") can be drawn on a simple supply and demand curve.

£+  \   /S1 /S2
 +   \ /   /
 +  A x   / 
 +   / \ /
 +  /   x B
 + /   / \
 +    /   \D1
0                      QTY

As the subsidy results in some of the production costs being paid for by the government, the producers will be happy to increase their output. This is shown by the expansion of supply from S1 to S2. Assuming that demand remains constant at D1, the equilibrium position will shift from A to B, leading to a lower equilibrium price and higher equilibrium output.

An example of a subsidised industry is farming, where the EU will subsidise uncompetitive farmers to keep them in the market, preventing urban migration.

(thanks to dann for help!!)

”Imputing a subsidy, especially if laws are passed to force its mixed use, to lower the price already signals that this is distorted and therefore, economically inefficient.” (Tito F. Hermoso, Business World magazine columnist)

A subsidy is government aid given to a business or economic sector to artificially increase its chance of success. If random product was selling at 50 cents a bushel, the government would come in and pay an additional 50 cents per bushel to Mr. Farmer. This increases the likelihood of said farmer to grow more of that particular product.

Also known as a subvention.

    There are many types of subsidies, including:
  • Direct and indirect subsidies
  • Labor subsidies
  • Tax subsidy
  • Perverse subsidies
  • Production subsidies
  • Regulatory advantages
  • Import tarrifs as trade protection, and export subisides as trade promotion
  • Procurement subisides
  • Consumption subsidies

A position against subsidies
Subsidies destroy the free market, are anti-capitalism in nature, and artificially inflate a product that may not even be cost effective in the first place.

Subsidies in the USA raise prices globally
In recent years, extreme controversy has created a row over subsidies for products like biofuels, corn (for ethanol), fish, wheat, rice, soy, etc. Foods that would normally be consumed, are now being used as fuel. The United States’ production on corn especially has increased phenomenally. The problem is this, corn is being turned into ethanol, but it takes five times as much energy to get a tank of fuel out of corn than it does from normal gas. “The price of corn has more than doubled, since it is now a competitor to oil rather than food grains, putting ranchers, hog farmers and other feed users under enormous pressure.” (Ruannalls)

Additionally, production of the “green” fuel is not necessarily better on the atmosphere. Then the price of corn goes up, but only for the purpose of ethanol, and most likely not for eating purposes. The price of corn is affected worldwide, however, it would take an economist to explain why, as all of this corn production is domestic only, and they tariff inbound corn. Either way, farm subsidies in first world countries depress world food prices so much that local farmers in third world countries cannot afford to sell on the international market (or even the local market), pushing them out of business. Raising world food prices through biofuels will cause some people to starve, but may be a major economic boon for many local farmers around the world, for better or worse. “While a growing use of grain as feedstock for biofuels could boost food prices beyond current levels, the trend could also exert additional stress on already highly exploited land and water resources worldwide.” (Birmingham Post) The US will have to increase crop lands beyond capacity, and worldwide prices on food will continue to go up. Add this to all the other food related subsidiaries, and you have a serious food shortage on your hands. Many foods are being turned into fuel, instead of being consumed. “The International Monetary Find also warned that an increasing global reliance on grain as a source of fuel could drive up food prices in poor countries.” (Birmingham Post)

The fatal conceit of the government (and legislators) is that they think they can make predictions of what people will need in five years and the price they are willing to pay for it without sacrificing wealth to inefficiency. Or so postulated the Nobel-prize winning economist, Friedrich Hayek. And so we have the enaction of the law of unintended consequences, almost always adverse, where a few hundred legislators are deemed wiser than the nearly infinite number of nuanced economic decisions made by millions of their constituents. Which is essentially, the market.

Free trade of goods is the only efficient way of matching supply and demand. It is the only way to efficiently determine how much of a good is desirable for a given price.
That's why subsidies are distorting to this efficient functioning of markets. Subsidies create opportunities for those who cannot sell their goods in a fair and free market by tapping the coercive and redistributive forces of the government. Subsidies make uncompetitive goods artificially attractive by raising the price gap. Subsidies create an opportunity for manipulation of the government by special interests and lobbies, and all at the general public's expense. This damages any social welfare agenda because favoring a subsidy on one sector disadvantages another. Instead of giving consumers the best goods at lowest cost, the subsidized and previously overpriced good now becomes viable at the cost of the money used to subsidize it being taken away from more important uses.” (Hermoso)

As Hermoso explains, subsidies are destroying the free market. Giving an advantage to one market hurts another, but not even just domestically. “The UK's biofuels industry is under threat from subsidised fuels from the USA” (Farmers weekly)

Furthermore, if the government doesn’t remove subsidiaries now, they never will be able to; the government is getting trapped into a no exit policy. Those receiving the subsidies will gain market control. Then removing the subsidies would completely destabilize the market again. Which is a lesser evil, considering the brink point is capable of being reached only when foods are going to energy instead of consumption.

Sadly the fact of the matter is, subsidies don’t even obtain their goal. “Biofuel subsidies are not a cost-effective means of improving the environment.” (Kamalick)

Lou Dobbs effect
Artificial stimulation has caused the Lou Dobbs effect, a gold rush so to speak, in the biofuels market. "The US imposed a tariff on imports of ethanol, ensuring that local ethanol gains market share." (Hermoso) Lou Dobbs is a CNN commentator who often calls democrats to action, or even congress. When something sounds good and its advertised, regardless if its actually wholesome, people will want it.

“So how can we create a policy framework to support sustainable biofuels? Well, it will only happen when the federal government gets out of the business of picking technology winners with taxpayer money and instead creates greater parity in the use of incentives to reward genuine climate-friendly technologies” (Samson) It’s pretty clear that subsidies are being piled one on top of another without real market analysis. Congress is making decisions without consulting economists. The impact to the environment and the economy is not being analyzed, or even is being suppressed. It just doesn’t make sense to keep producing ethanol when a similar fuel made from sugar beats in Brazil is more cost effective and receives better results. The United States will lose soft power, if nothing else, from the situation when we cause poverished nations to go hungry.

We should go after oil shale, instead of green fuels that require subsidies that really destroy the whole point of capitalism, the free market.

Hermoso 2007 (Tito F. Hermoso, Business World, February 7, 2007, Biofuels: Subsidies and false economies)
Birmingham Post 2007 (Biofuels bandwagon is running short on energy; ENERGY October 25, 2007, Thursday)
Samson 2007 (Roger Samson is executive director of Resource Efficient Agricultural Production-Canada, a member of McGill University's Biofuels Network.)
Farmers weekly 2007
Ruannalls 2007 (David Runnalls is CEO and president of the International Institute for Sustainable Development. Subsidizing biofuels backfires, March 14, 2007 Wednesday)
Kamalick 2006 (Group urges US to end subsidies for biofuels)

Sub"si*dy (?), n.; pl. Subsidies (#). [L. subsidium the troops stationed in reserve in the third line of battlem reserve, support, help, fr. subsidere to sit down, lie in wait: cf. F. subside. See Subside.]


Support; aid; cooperation; esp., extraordinary aid in money rendered to the sovereign or to a friendly power.

They advised the king to send speedy aids, and with much alacrity granted a great rate of subsidy. Bacon.

Subsidies were taxes, not immediately on on property, but on persons in respect of their reputed estates, after the nominal rate of 4s. the pound for lands, and 2s. 8d. for goods.



Specifically: A sum of money paid by one sovereign or nation to another to purchase the cooperation or the neutrality of such sovereign or nation in war.


A grant from the government, from a municipal corporation, or the like, to a private person or company to assist the establishment or support of an enterprise deemed advantageous to the public; a subvention; as, a subsidy to the owners of a line of ocean steamships.

Syn. -- Tribute; grant. -- Subsidy, Tribute. A subsidy is voluntary; a tribute is exacted.


© Webster 1913.

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