Government subsidies are incentives offered to businesses or individuals in form of financial aid with the aim of promoting economic growth and social policy.
US federal government uses subsidies to promote a wide range of economic activities. The subsidies may be in form of grants, loans, tax breaks, insurance, and low-interest loans offered to businesses to support some of the activities the government wants to promote.
1. Reduce cost: Government subsidies reduce the cost of doing business. The government pays part of the production cost through tax credits. This reduces production cost and the consumers will benefit from low prices of goods.
2. Increase production and consumption: Subsidies are implemented to encourage more production and consumption in specific industries. The subsidies enable producers to increase their production and this results in increased supply.
3. Quality products: The support offered by the government enable suppliers to produce quality goods and sell them at low cost to the consumers.
4. Increase savings: Tax credits and reimbursements offered by the government enable suppliers to reduce the overall prices of goods and services and increase their savings.
5. Quality Public transport services: Subsidizing public transport by the government will result in less traffic and pollution on the roads. Transport incentives reduce the travel cost of every traveler on the road.
6. Reduces housing cost: Housing subsidies offered by the government are aimed at reducing poverty and ensuring more families are able to buy a house. The subsidies ensure the public have access to cheaper houses.
7. Reduces the unemployment rate: Offering subsidies helps some firms not to go bankrupt and reduce job losses in firms.
8. Reduce competition: Subsidies are given to certain industries to protect them from external competition and to maximize the benefits of domestic products.
9. Reduce market failure: Government offer subsidies to correct the imbalance of goods and service being undersupplied. Subsidy reduces the cost of bringing goods into the market and ensure the actual supply of goods and services doesn’t fall below the equilibrium level.
10. Promote positive externalities: Subsidies are offered to promote positive externalities between parties that may otherwise not provided at a socially optimal level.
1. Product shortage: Subsidies on a particular product reduces the price of the product and this leads to increased demand for the product and less supply hence shortage on the product in the market.
2. Increased taxes: There is an opportunity cost associated with government subsidies. Consumers may benefit from reduced prices of commodities but they indirectly pay the cost of the subsidy through taxes.
3. Difficult to determine success: It is very difficult to determine the yardstick of success by quantifying various positive externalities.
4. Inefficiency: Government subsidy may encourage inefficiency as more firms rely more on the grants or money offered by the government.
5. Affect product competitiveness: Increasing the income as well as reducing the prices of products may lead to loss of product competitiveness in the international market.
6. Lack of information: Government doesn’t have enough information on who should receive the subsidy and the amount of subsidy to give out to different businesses and individuals.
7. Benefit the rich: Majority of the government subsidies only benefit the rich people and the poor people have to pay the same tax rate even when they can’t afford the basic needs.
8. Reduce incentives for firms to cut cost: If the government subsidizes firms by paying part of the cost. This makes firms reduce incentives or strategies for reducing the cost of production.
9. Continuous pressure: Once the government offer subsidies as a temporary program, it becomes very difficult to remove the subsidy due to the pressure received. The government ended up offering a permanent subsidy which led to a net welfare loss.
10. Divert resources: Subsidies distort markets by diverting resources from more productive uses to less productive uses.