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Subsidy: Grant for the Greater Good

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Economics

A subsidy is a basic term of economics that has many meanings. It is, at its most basic, the transfer of money or wealth from a government to a person or people.

The government will grant a subsidy to someone because that person is thought to need the money in order to maintain an acceptable standard of living. Welfare payments and student loans are two common descriptions of this kind of subsidy. A person who receives welfare checks is having trouble meeting ends meet. Perhaps he or she has just lost a job or has just suffered serious injury and can't work. Government programs provide money to people in these situations in order to help them get back on their feet. Student loans are also considered subsidies because students often have difficulty paying for their college fees. The government thinks that it is in its best interest to encourage students to study and graduate from college, in order to become productive workers, so the government will assist students in this way.

The government will also grant a subsidy to someone in order to spur economic growth or to prevent a glut on the market. Startup businesses sometimes do not have all the money they need to get going properly. The government will grant businesses like this a subsidy so that these businesses can start producing things that the government thinks will benefit it and society as a whole.

Other industries find government assistance as well. A government will want to give money to a farmer, for instance, in order to encourage him or her to grow crops on his or her property for sale elsewhere. The money that farmer gets for selling those crops is thought to be good for the government's economy, even if the farmer sells to people in his or her own country.

Farm subsidies are an entirely different kind of subsidy as well. The U.S. Government, especially, pays some farmers money in order to not grow certain crops or use certain land. Even with the number of farmers dropping every year, American farmers still could produce too much food if they were at full capacity. As odd as it may sound, the U.S. Government thinks it best if certain farmers don't produce a certain amount of crops and so pays those farmers to keep their lands empty, at least of certain crops.

Other parts of society get subsidies as well. The government gives grants to science projects, arts groups, and other non-business organizations because these are believed to be part of making society better.

A subsidy is not always a direct payment. Sometimes, a subsidy will take the form of a drop in price or expenses. This is often found in businesses that compete internationally. American steel companies, for example, might find that they have to pay less taxes or less for certain goods than would companies in other countries. The U.S. government wants its steel companies to be competitive and make lots of money from people in other countries, so it makes it a little easier for American steel companies to do business.

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An even more indirect subsidy can be found in the form of a tariff, which is, essentially, a tax that some but not all people or businesses pay for certain goods. Steel companies in other countries might find that they had to pay very high taxes in order to sell their steel in the U.S., whereas American companies could avoid such high taxes.)

The one thing that all subsidies are, in general, is one-way transactions. In nearly every case, money flows in just one direction. What the governments gets for its money is not always countable in terms of dollars and cents. Subsidies to improve the arts and sciences sometimes result in things that benefit society as a whole but don't really put money back into the economy. Other subsidies, such as the steel tariff, make it easier for American steel companies to do business, bringing more money into the country. One big exception to this one-way-only transaction, of course, is student and other kinds of loans, which are eventually paid off, resulting in more money back into the government's coffers than went out.

 
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