Subsidy

Subsidies are used to encourage activities that governments consider beneficial or to make essentials more affordable. They can take many forms, including direct payments, tax breaks, low-interest loans or government purchases at guaranteed prices.

Examples include subsidies for renewable energy, public transport, agriculture, education, housing and electric vehicles. A government might pay 3,000 towards the cost of each new electric car to encourage people to switch from petrol cars.

A subsidy lowers the cost to producers or buyers, which increases the quantity produced and consumed. It can help correct positive externalities, where an activity benefits society more than the people doing it, such as vaccination or research.

Subsidies also have costs. They are paid for by taxpayers, they can encourage overproduction, they may benefit businesses that would have been profitable anyway and, once introduced, they can be politically difficult to remove. Economists generally assess whether the benefits of a subsidy outweigh its cost and whether it targets the intended people or activities effectively.