Subsidy
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In economics, a subsidy is generally a monetary grant given by government to lower the price faced by producers or consumers of a good, generally because they are considered to be in the public interest. Sometimes, the term subsidy may also refer to assistance granted by others, such as individuals or non-government institutions, although this is more usually described as charity. A subsidy normally exemplifies the opposite of a tax, but can also be given using a reduction of the tax burden. These kinds of subsidy are generally called tax expenditures or tax breaks.
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Overview
In standard supply and demand curve diagrams, a subsidy will shift either the demand curve up (subsidized consumption) or the supply curve down (subsidized production). Both cases result in a new, higher equilibrium quantity. Therefore, it is essential to consider the price elasticity of demand when estimating the total costs of a planned subsidy: it equals the subsidy per unit (difference between market price and subsidized price) times the higher equilibrium quantity. One category of goods suffers less from this effect: Public goods are -- once created -- in ample supply and the total costs of subsidies remain constant regardless of the number of consumers; depending on the form of the subsidy, however, the number of producers demanding their share of benefits may still rise and drive costs up.
Examples of subsidies include welfare, farm subsidies, and (in some countries) certain aspects of student loans.
Controversy
Many developing nations who are dependent on exports of farm produce argue that subsidies, given to farmers in rich nations are the biggest single contributor to their continued poverty. The subsidies drive down the global market price to the point where farmers in poor nations, who do not receive subsidies, can no longer earn a living by selling their products. As a result not only are they unable to work their way out of poverty by selling their products, but they also become dependant on imports of subsidised goods because they are cheaper than locally produced goods. Most rich nations are reluctant to change their policy of giving subsidies though, because their inherently higher labour costs make their domestic farmers unable to compete globally without the subsidies. Removing the subsidies would mean lost jobs, and with powerful lobby groups and popular support to consider few politicians are willing to change the status-quo in favour of poor farmers abroad, at the expense of local farmers.