I just read a post about how the US spends more on fossil fuel subsidies than on Education and I am totally confused as to their purpose and effectiveness.
In: Economics
Subsidies are a form of government intervention in the market to create a distortion. Loosely defined, a market distortion is a deviation from what a “free market” would predict in terms of the equilibrium of supply and demand at a price point. [The theory being that with no distortion, producers and buyers will naturally converge to a price that balances supply and demand]
Many/most subsidies involve reducing the cost of production, thereby increasing the incentive for producers. Subsidies like this can come in the form of direct payments, government guaranteed loans, guaranteed purchases.
Some subsidies like education can come in the form of reducing cost to the buyers. In this case, government guaranteed loans, scholarships, etc to students.
In either case, the idea of the subsidy is to increase supply and demand of a particular product. Subsidies are not free, of course, and much of the cost of that subsidy will be borne by the taxpayer.
There are many (policy) reasons that subsidies are created. (list is not exhaustive below ELI5)
1) Infant industry protection. The most recent examples are solar panels/solar power. The idea is that some product with desirable characteristics (no CO2 emission) but is new and still costly relative to their competition (e.g. fossil fuel power). For prices of solar power to drop, the industry needs to grow but to grow, it needs customers, but cost is too high. Therefore (temporary) subsidies serve to give the opportunity for the smaller but “better” product to compete and grow.
2) Provision of a public good. Education is seen as a public good – benefiting society as a whole. But left to the free market, the supply of education will be less than optimal (perhaps only the middle class and wealthy) or poorer quality schools. Healthcare, law enforcement, defense are other examples. Governments can subsidize (or sometimes just takeover in the case of armies) the industry to better serve the general public.
3) Government policy. For example, “food security” or “support rural population”. The free market is indifferent. So, new technologies, imports etc can displace employment, favoring urban employment for example. This may not be seen as a good thing (large rural poverty/unemployment) and subsidies are one tool that can be used to support a desired policy outcome.
Whether subsidies are “fair”, “effective” or “beneficial” is not easy to gauge. Some are not so controversial (general public education – although even this has come under fire in the US) while others perhaps are highly debated. Fuel subsidies, for example, can fall partly into the “public good” as well as “government policy” argument. Without subsidies, fuel prices will increase. From a policy perspective, this hurts the poor much more than the wealthy. Fuel is also energy and if energy prices rise, inflation increases and employment decreases. You can argue that an adequate supply of energy is also a public good.
Even when there is little controversy on the need for intervention, economists, politicians and the general public can argue over what form of intervention is preferred. Subsidies, tariffs, nationalization are all forms of intervention. What someone believes is the “best method/outcome” is often a complicated mixture of their political, philosophical and other contextual influences.
A government subsidized industry is aided and partially funded by the government. These subsidies come in different forms, such as certain types of bursaries, loans and tax breaks. The US Govt subsidizes the oil and gas industry more than schools. Oil would cost more per gallon if subs were cut. There would better funded schools if their subs were increased
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