A subsidy is generally a monetary grant given by government in support of an activity regarded as being in the public interest. Sometimes it may also refer to assistance granted by others, such as individuals or non-government institutions, although this is more usually described as charity.
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.
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.
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See also