Types of subsidies

A consumption subsidy is one that subsidies the behavior of consumers. These type of subsidies are most common in developing countries where governments subsidies such things as food, water, electricity and education on the basis that no matter how impoverished, all should be allowed those most basic requirements.[1] For example, some governments offer 'lifetime' rates for electricity, that is, the first increment of electricity each month is subsidised.[1]

Export subsidy

An export subsidy is a support from the government for products that are exported, as a means of assisting the country’s balance of payments.[2] Usha Haley and George Haley identified the subsidies to manufacturing industry provided by the Chinese Government and how they have altered trade patterns.[5] Traditionally, economists have argued that subsidies benefit consumers but hurt the subsidizing countries. Haley and Haley provided data to show that over the decade after China joined the World Trade Organization industrial subsidies have helped give China an advantage in industries in which they previously enjoyed no comparative advantage such as the steel, glass, paper, auto parts, and solar industries.[5]

Employment subsidy

An employment subsidy serves as an incentive to businesses to provide more job opportunities to reduce the level of unemployment in the country (income subsidies) or to encourage research and development.[2] With an employment subsidy, the government provides assistance with wages. Another form of employment subsidy is the social security benefits. Employment subsidies allow a person receiving the benefit to enjoy some minimum standard of living.

Tax subsidy

Government can create the same outcome through selective tax breaks as through cash payment.[3] For example, suppose a government sends monetary assistance that reimburses 15% of all health expenditures to a group that is paying 15% income tax. Exactly the same subsidy is achieved by giving a health tax deduction. Tax subsidies are also known as tax expenditures. Tax subsidies are one of the main explanations for why the tax code is so complicated.[6]

Environmental externalities (earlier posted here)

As well as the conventional and formal subsidies as outlined above there are myriad implicit subsidies principally in the form of environmental externalities.[4] These subsidies include anything that is emitted but not accounted for and thus is an externality. These include things such as car drivers who pollute everyone’s atmosphere without compensating everyone, farmers who use pesticides which can pollute everyone’s ecosystems again without compensating everyone or Britain’s electricity production which results in additional acid rain in Scandinavia.[4][7] In these examples the polluter is effectively gaining a net benefit but not compensating those affected. Although they are not subsidies in the form of direct economic support from the Government, they are no less economically, socially and environmentally harmful.