Everyone loves walking past their favourite clothing store and spotting a discount while window shopping. Turns out, firms love getting discounts too!
A subsidy put simply is when the government gives a firm or industry money so that the goods or services cost less, like a discount or your parents helping to pay part of your phone bill. Governments grant a sum of money to a firm, which in turn lowers their production costs, resulting in prices being lowered for consumers. Generally, governments do this to increase the supply of a product they believe will be good for society, ensure that the production of a specific product is stable or encourage consumption.
When the government grants a subsidy, how are stakeholders affected? Firstly, consumers benefit from the lower prices of goods and services meaning they have to spend less of their real income. Additionally, firms benefit from the decreased production costs. The government however faces a fiscal burden, which is the strain they have created by choosing to fund one particular industry, in turn creating an opportunity cost.
One every day example of a subsidy in action is public university education. Many governments choose to subsidize these public universities, decreasing tuition for students to make it more affordable while still ensuring that the university itself has the funds to continue running.
Remember, subsidies are grants of money that benefit firms and consumers but create a burden on the government. Maybe discounts aren’t great for everyone.