Effects of Subsidies

5 Key excerpts on "Effects of Subsidies"

• 

  eBook - PDF

  Routledge Encyclopedia of International Political Economy

  • R. J. Barry Jones(Author)
  • 2002(Publication Date)
  • Routledge

    (Publisher)

  Needless to say, the welfare costs of subsidies usually go beyond their explicit or immediately visible budgetary or quasi-fiscal cost. In effect, subsidies lead to overproduction of the subsidized good, since production and consumption are expanded beyond the point where the marginal social benefit of consuming the good is equal or greater than the marginal social cost of production. The efficiency losses associated with subsidy programmes can be substantial. Subsidies may often have unintended effects on resource allocation. For instance, when introducing a subsidy for imported foodstuffs that lowers the consumer price for these goods, the quantity demanded may increase as well, so that it may become necessary to increase imports in order to avoid shortages. This, in turn, will affect the availability of foreign exchange, leading to pressures to reduce other imports or depreciate the exchange rate. Adverse distributional effects can be ex-pected to be particularly strong when market imperfections provide opportunities for rent seeking. For instance, price controls on agri-cultural products that lower the price below the competitive market equilibrium will, in all likelihood, result in shortages if imports are not allowed to fill this gap. The shortage will provide opportunities to earn economic rents for well-placed groups that have privileged access to the product at the controlled price. The poor (presumably the group that the price control seeks to protect) may frequently not have access to the subsidized product at its controlled price. The net result may be that, on average, consumers end up paying a price that is higher than the competitive market price, with the benefit of the price-control policy accruing to traders.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Commitments and Flexibilities in the WTO Agreement on Subsidies and Countervailing Measures

  An Economically Informed Analysis

  • José Guilherme Moreno Caiado(Author)
  • 2019(Publication Date)
  • Cambridge University Press

    (Publisher)

  Government use of subsidies will thus create economic inefficiencies that depart from the optimal equilibrium. In the long term “the effects of the advantages conferred on the subsidized firm may mean it faces less competitive pressure in the future,” 44 , resulting in a potential decrease in consumer welfare. Assuming that markets function perfectly, therefore, subsidies would only worsen net welfare, and if governments care mainly to benefit overall welfare, then “no case can be made for a subsidy.” 45 The application of this domestic market analysis to economies that are open to international trade yields similar results: optimum market equi- librium is achieved without governmental intervention, and policy recommendations are that free trade is most efficient. 46 As the WTO is mainly concerned with the trade, or international, Effects of Subsidies, it is necessary to examine in more detail the scenarios in which different types of subsidies, i.e. consumption, production, and export subsidies, impact trade. 47 43 The same is true for tariffs. Acting in a perfect market, benevolent governments who care about global overall welfare will not resort to tariffs and international regulation of the matter might therefore not be necessary. 44 UK, Public Subsidies p. 21. 45 WTO, Exploring the Links between Subsidies, Trade and the WTO p. 55. This is also true in an opened economy scenario. In both cases, subsidization would result in inefficient allocation of resources because of the costs it inflicts on taxpayers, and non-market signaling of prices due to the wedges between the world price and the subsidized price paid to domestic producers. In addition, a portion of domestic output would be deter- mined by the subsidy, and not by world prices, thus raising domestic production above the optimum level. Under perfect market assumptions, therefore, one issue that would require explanation is, in the first place, the reason why governments would make use of subsidies.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Stuck in the Middle

  Is Fiscal Policy Failing the Middle Class?

  • Antonio Estache, Danny Leipziger, Antonio Estache, Danny Leipziger(Authors)
  • 2009(Publication Date)
  • Brookings Institution Press

    (Publisher)

  However, the bad reputation of subsidies is hard to reconcile with the long-lasting effective support they enjoy from politicians that perpetuates their existence. The perva-siveness of this instrument is an indication of its broad support beyond politi-cians. But this support for an apparently ineffective and possibly regressive instrument is puzzling. Why Do Many Economists Still Support Subsidies? The tendency in public discourse and the press is to think of subsidies as pay-ments to producers. However, as some of the examples above show, subsidies apply to producers and consumers. Simply put, the definition of a subsidy is when the price (or what would be the market-determined price) is lower than the cost, and the government provides the funds to fill this gap. Clearly this can lead to confusion in the appreciation of what is a subsidy and how effective it is. The core source of this confusion stems once more from the competing rationales used to justify subsidies. Consider the case of primary health care. One often hears a wide range of arguments as to why governments should subsidize it. One group argues that primary health care is a basic right, so access to it must be an equity issue. The hard-headed economist says no, lack of access to primary health care is a market failure due to incomplete information on the part of the clients, or maybe a discount rate issue leading to an underinvestment in preventive health. The not-so-hard-headed economist says no, access to primary health care is an externality—healthier people will be better able to participate in society—a concept that people do not take into account when making individual, private health care choices. All of these arguments might be valid reasons for a subsidy. However, they can have different implications as to whom the government subsidizes, how much of a subsidy is offered, how the subsidy is offered, and the like.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Spending to Win

  Political Institutions, Economic Geography, and Government Subsidies

  • Stephanie J. Rickard, Stephanie J. Rickard(Authors)
  • 2018(Publication Date)
  • Cambridge University Press

    (Publisher)

  Measuring Particularistic Economic Policy 65 What Are Subsidies? Disagreement abounds about the precise definition of subsidies. “The word subsidy derives from the Latin word subsidium, which means ‘help, support, or assistance’ and in medieval times referred to a payment made to the king” (Fryde 1983, Steenblik 2017). 2 Today, subsidies cover a wide range of government policies. Subsidies include: cash grants, tax breaks, loans at below-market interest rates, loan guarantees, capital injections, guaranteed excessive rates of profit, below- cost or free inputs including land and power, and purchasing goods from firms at inflated prices. 3 The breadth of possible policy options generates confusion about exactly what constitutes a subsidy. The World Trade Organization provides one of the only internationally agreed upon definitions, which delineates a subsidy as a financial contribution by a government that confers a benefit on its recipients (WTO 2006). I adopt this definition. Just as many definitions of subsidies exist, there is also a striking array of synonyms for subsidies. Frequently used terms include industry assistance, industrial policy, industrial strategy, corporate welfare, and government support programs. The European Union uses the term “state aid” to describe subsidies provided to producers by member state governments. Another increasingly common term is “economic incentive” (e.g. Jensen 2017), which typically refers to subsidies that take the form of a tax incentive. Tax incentives reduce companies’ tax burdens thereby allowing businesses to keep a larger share of their revenue. Quantifying tax incentives is notoriously difficult and few, if any, cross-nationally comparable measures of tax incentives exist. Like tax incentives, many other types of subsidies are also difficult to measure.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  WTO Disciplines on Subsidies and Countervailing Measures

  Balancing Policy Space and Legal Constraints

  • Dominic Coppens(Author)
  • 2014(Publication Date)
  • Cambridge University Press

    (Publisher)

  In short, producer subsidies are distinguished on the basis of the conditions attached thereto and thus on the specific activity (e.g., exports, production, R&D, acquisition of fixed assets) they directly or indirectly aim at stimulating. Accordingly, the concept of ‘subsidies’ is occasionally distinguished from so-called ‘transfers’, as the latter are not conditioned on any specific use and are therefore considered to leave the allocation of resources unaffected. With these broad descriptions in mind, the rationales for subsidization, or the absence thereof, are introduced. 1.1 The absence of a rationale for subsidization In a world of complete and perfectly competitive markets, mere interaction between supply and demand results in an efficient allocation of resources and a level of output produced at the lowest possible price, which equals the marginal cost of production and the socially optimal price. 5 Welfare is maximized under market forces (Pareto optimum 6 ) and government 5 In a perfectly competitive market, firms are price takers and can enter or exit freely, and products are homogeneous. As a result, price will equal marginal costs of production. Complete markets are characterized by full information and the absence of externalities, resulting in a price which also equals the socially optimal price. 6 Marginal costs to producers equal marginal benefits to consumers, implying that no one can be made better off without someone else being made worse off. 6 rationales for offering subsidies interventions only distort efficient resource allocation by creating a wedge between the marginal cost price and the socially optimal price. 7 In those markets, there is no reason why a static welfare-maximizing government would offer a specific subsidy to an industry.

  Sign up to read

  Learn more about book