Subsidy Programs and Financing

Subsidies are an example of government benefit which can be in the form of tax breaks, cash payments and guaranteed or low-interest loans. They are usually intended to encourage a particular economic activity or to achieve a social or political purpose. However, subsidies can create negative effects and reduce the effectiveness of public spending.

Substitutes may be considered a reverse tax since they give money to people or companies to take part in a particular activity and do not charge them for it (for instance tax incentives or student loans). Governments usually provide subsidies to products or activities in order to provide economic and environmental benefits.

For example, governments may provide subsidies for the production of renewable energy by providing tax breaks to encourage its use, and making it mandatory for utilities to purchase it. They can also help to pay for the cost of housing by offering a loan or grant that covers a portion of the cost of renting or purchasing an apartment. This allows more people to live in an area they wouldn’t be able to afford otherwise.

The purpose of subsidy programs are different but they are typically designed to achieve a specific national strategic objective or winning a competitive advantage on international markets. In some cases they help to offset a natural or structural weakness in an economy. For example, producer subsidies in agriculture can help support prices for farmers over the cost of imported food products. These kinds of subsidies could alter market prices and result in a misallocation of resources.