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What is a 'Subsidy'

A subsidy is a benefit given by the government to groups or individuals, usually in the form of a cash payment or a tax reduction. The subsidy is typically given to remove some type of burden, and it is often considered to be in the overall interest of the public.

BREAKING DOWN 'Subsidy'

Often considered a form of financial aid, a subsidy is a payment, provided directly or indirectly, that provides a concession to the receiving individual or business entity. Subsidies are generally seen as privileges, as they lessen an associated burden that was previously levied against the receiver or promote a particular action by providing financial support.

Reasons for Subsidies

A subsidy is generally used as a form of support for particular portions of a nation’s economy. It can assist struggling markets by lowering the burdens placed on them, or encourage new developments by providing financial support for the endeavors. Often, these areas are not being effectively supported through the actions of the general economy, or may be undercut by activities in rival economies.

Direct Versus Indirect Subsidies

Direct subsidies are those that involve a direct payment toward a particular group or industry. In a direct subsidy, cash can be provided to the specified group in the form of a check.

Indirect subsidies are those that do not hold a predetermined monetary value that is specifically directed toward a particular industry or individual. This can include activities such as price reductions for required goods or services that can be government supported. This allows the needed items to be purchased below the current market rate, resulting is a savings that is ultimately determined by the amount of participating activity.

Examples of Subsidies

There are many forms of subsidies given out by the government, including welfare payments, housing loans, student loans and farm subsidies. For example, if a domestic industry such as farming is struggling to survive in a highly competitive international industry with low prices, a government may give cash subsidies to farms so that they can sell at the low market price but still achieve financial gain.

Subsidies in Health Care

With the enactment of the Affordable Care Act in the United States, a number of U.S. citizens became eligible for health care subsidies based on the income and family size of the associated household. These subsidies are designed to lower the out-of-pocket costs for health care premiums on households that function below certain thresholds. In these instances, the funds associated with the subsidies are sent directly to the insurance company to which premiums are due, lowering the payment amount required from the household.

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