Subsidies Research Paper

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A subsidy is a benefit, in some form, which one would not otherwise receive, but the concept is more complex than such a simple definition implies. The twin cruxes of the problem are the determination of the basis of comparison by which a subsidy is reckoned and whether the comparison is treated positively or normatively and if the latter negatively or affirmatively. Consider the following examples:

A rich uncle will pay your college tuition and living expenses if you go to college.

Parents arrange for one child to inherit more than the other, where the norm is equal shares.

A polluting firm may be offered a payment if it will stop its polluting activities.

A firm producing multiple outputs allocates costs on paper so that they differ from what they actually are; for example, residential customers pay telephone rates below their cost of service and business subscribers pay more than their cost of service, or, more specifically, poor residential customers benefit from below-cost rates that are financed by the higher rates paid by wealthier customers.

An industry is given payments by government so that it will expand, or not contract, thus providing more employment than it otherwise would.

A shift from one costing procedure to another increases some measured costs and decreases others.

A change from one institution to another changes the distribution of gains and losses.

Whether or not a subsidy exists in each of the examples depends on the choice of basis; in the last two examples, the subsidy depends on the cost procedure or the institution used as the basis of comparison.

Accordingly, a decrease in business telephone rates implies a subsidy to business if one believes the lower residential rates are proper; if one thinks that low residential rates involve an improper subsidy to householders, an increase in those rates (and a decrease in business rates) will end the subsidy. A change in rates based on a shift in costing procedure means gainers are being subsidized if you posit that the initial costing procedure is correct; but if you consider the initial costing procedure to be erroneous, those people are now not being subsidized and others are. A change from one costing procedure to another creates a subsidy to gainers if you assume that the initial costing procedure is proper; they are getting more than they should. If you think the second costing procedure is correct, then the gainers are not being subsidized; they are getting what they should. Non-normatively, changes in costing procedures bring about different net income changes.

The foregoing examples are stated in largely non-normative terms. The concept of subsidy often has a negative normative connotation when it could have an affirmative one—it depends on the choice of base as to what people are entitled. The “choice of base” is illustrated in the following examples.

The rich uncle may be spoiling you or he may be contributing to the family’s practice of taking care of its own, depending on what view, or base, one takes.

The parents may be punishing one child or they may be providing for a child so ill that he or she cannot support himself or herself. If one feels that children should be treated equally, the ill child is being subsidized. If one feels that distribution of an estate should be a matter of relative need, then no subsidy in a pejorative, i.e., negative, sense is created.

One may feel that polluters should not be rewarded for polluting by paying them not to pollute; indeed, they should be taxed if they pollute. Yet, the tax and payment policies are analytically equivalent. Imposing a tax on pollution lowers the polluters’ profits, thereby inducing them to spend money to install pollution-preventing equipment to avoid paying the tax; similarly, providing a subsidy to install such equipment can induce the firm to enhance its income position by receiving the subsidy. In each case, the firm is led to change its behavior, and the result is less pollution.

An alternate definition of a subsidy is a benefit, in some form, that is not received through the market. This definition posits market distribution as the base. Several problems arise with this definition. Firstly, the market is not the only decisional arrangement in society; government and nonprofit organizations are other modes of distributing gains and losses, and positing market distribution negates these other modes. Secondly, there is no such thing as “the market”; there can be different markets, all of which are the result of the actions, plans, and strategies of firms and of governments to influence the structure and performance of markets. Distribution through one market is a subsidy if an individual considers another market to be proper. Different structures of power lead to different structures of rights and of markets; whether a subsidy exists will depend on the structure posited as proper.

For the rich uncle, one may substitute one’s church or the government or other nonprofit educational and charitable institutions. These may receive voluntary donations and transfer the money to people who qualify on the basis of perceived capabilities, needs, or redistributive goals, to create and give effect to a sense of community—payments giving effect to people’s social preferences. Programs to encourage the integration of immigrants into the community may involve short-run subsidies, but they avoid the costs of unemployment dislocation and enhance productivity in the long run by improving working and other skills. The benefit so transferred may qualify as a subsidy under the definition of subsidy as a benefit which one would not receive through the market. That privileges market determination, or, more properly, the power structure that produces certain actual markets and not others, and debases other, nonmarket decisional processes.

The negative connotation of a subsidy may be warranted in the case of “pork” politics and the “Christmas tree” collection of payments and other benefits to interest groups having influence in the legislature. This view is only partly in conflict with those that see the role of government as helping to solve problems in the social interest and enabling people to receive their just due. It may be that a distinction has to be made between transfers/subsidies that represent returns to political fund contributors and those that represent putative solutions to social problems; however, the language of political symbolism is elastic enough to blur the distinction.


  1. Boulding, Kenneth E. 1972. Redistribution to the Rich and the Poor. Belmont, CA: Wadsworth.
  2. Buchanan, James M. 1987. Public Finance in Democratic Process. Chapel Hill: University of North Carolina Press.
  3. Lasswell, Harold D. 1936. Politics: Who Gets What, When, How. New York: McGraw-Hill.
  4. Musgrave, Richard A. 1986. Public Finance in a Democratic Society. New York: New York University Press.
  5. Page, Benjamin I. 1983. Who Gets What from Government. Berkeley: University of California Press.
  6. Sen, Amartya K. 1999. Commodities and Capabilities. New York: Oxford University Press.

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