Types of Subsidies

Definition of Subsidy

• A subsidy is a grant, which means money given with no repayment obligation.
• It can be in cash or kind (material) to promote economic or social policy.

Types of Subsidies

1. Direct vs. Indirect Subsidies

• Direct Subsidies: Given directly to beneficiaries (e.g., cash grants, interest-free loans).
• Indirect Subsidies: Reach beneficiaries through a third party (e.g., tax breaks, premium-free insurance).

2. Six Primary Categories of Subsidies

1. Export Subsidies: Encourage exports.
2. Domestic Goods Subsidies: Promote domestic goods over cheaper imported goods.
3. Industrial Promotion Subsidies: Support specific industries.
4. Structural Adjustment Subsidies: Address structural deficiencies in the economy.
5. Regional Development Subsidies: Foster development in specific regions.
6. Research and Development Subsidies: Encourage research and innovation.

3. Broad vs. Narrow Subsidies

• Broad Subsidies: Cover a wider group.
• Narrow Subsidies: Limited to specific businesses or industries.

Stakeholders in Subsidies

• Producers: Subsidies to enhance market position (e.g., support for production).
• Consumers: Subsidies to lower prices and increase demand.

Welfare Promotion

• Governments use subsidies to promote welfare (housing, education, subsistence) but can be tools for political and corporate interests.

Classification of Goods and Subsidies

1. Public Goods

• Goods that cannot exclude individuals (e.g., national defense, public transport).
• Characterized by non-rivalry and non-excludability.
• Not included in subsidy calculations due to lack of pricing.

2. Merit Goods

• Consumption leads to positive externalities (e.g., vaccinations, education).
• Public benefit exceeds private benefit, justifying subsidies.

3. Non-Merit Goods

• Consumption results in negative externalities (e.g., environmentally harmful products).
• Cost to society is higher than consumer price.

Types of Subsidies Breakdown

1. Cash Subsidies: Direct cash payments.
2. Interest Subsidies: Lower interest rates for loans.
3. Tax Subsidies: Tax exemptions or reductions.
4. In-kind Subsidies: Material goods provided.
5. Procurement Subsidies: Assured prices for goods (e.g., Minimum Support Price).
6. Regulatory Subsidies: Price controls in public sectors to aid consumers.
7. Budgetary Subsidies: Included in government budget as excess costs over recoveries.

Conclusion

• Understanding various subsidies is crucial for assessing economic policies and their implications.
• This lecture covered the definition, types, categories, and implications of subsidies in different contexts.