Government subsidies help an industry by paying for part of the cost of the production of a good or service by offering tax credits or reimbursements or by paying for part of the cost a consumer would pay to purchase a good or service.

Governments seek to implement subsidies to encourage production and consumption in specific industries. On the supply side, government subsidies help an industry by allowing the producers to produce more goods and services. This increases the overall supply of that good or service, increases the quantity demanded for that good or service, and lowers the overall price of the good or service.

Since the government helps suppliers through tax credits or reimbursements, the lower overall price of their goods and services is more than offset by the savings they receive.

On the consumer side, government subsidies can help potential consumers with the cost to of a good or service, usually through tax credits. A great example of this is when consumers who refit their houses with solar panels receive a tax credit to offset the high price of purchasing the new solar panels. This helps the renewable energy industry by allowing more consumers to purchase the products associated with that industry.

Government subsidies can help an industry on both the supplier side and the consumer side. To implement subsidies, governments need to raise taxes or reallocate taxes from existing budgets. There is also an argument that incentives in the form of subsidies actually reduce the incentives of firms to cut costs.

  1. What are the ethical arguments against government subsidies to companies like Tesla?

    Learn about the ethical argument behind government subsidies. Read Answer >>
  2. Is the high cost of installing solar panels justified by the money saved by going ...

    Find out whether solar panels pay off in the long run and about how long homeowners who purchase them have to wait to break ... Read Answer >>
  3. What are the advantages of a limited government in connection with a capitalist economy?

    Read about the advantages of limited government, why free markets are more efficient and how social cooperation grows where ... Read Answer >>
  4. Which economic factors most affect the demand for consumer goods?

    Understand how key economic factors such as inflation, unemployment, interest rates and consumer confidence affect the level ... Read Answer >>
  5. What nations are actively recruiting FDI (foreign direct investments)?

    Understand the concept of foreign direct investments, and learn which countries most enthusiastically pursue investments ... Read Answer >>
  6. How does revolving credit differ from a general line of credit?

    Examine the consumer goods sector, which accounts for nearly one-third of consumer spending, and learn which goods account ... Read Answer >>
Related Articles
  1. Small Business

    Government Subsidies For Business

    Many industries rely on government assistance in both good times and bad. What are the benefits of these programs, and how do they impact the consumer?
  2. Investing

    Understanding How Oil Companies Pay Taxes

    Read about how big oil corporations pay taxes, and learn about tax exemptions and the option to defer. Discover the argument about big oil being given tax exemptions
  3. Insights

    How Governments Influence Markets

    The government, the biggest influence in the markets today, can create some unintended consequences.
  4. Investing

    Amazon Seeks 'Business Friendly' City for HQ2

    Cities are expected to engage in a bidding war to house Amazon.com Inc.’s $5 billion second headquarters.
  5. Insights

    How Fortune 500 Companies Avoid Paying Income Tax

    President Donald Trump is not alone in not paying taxes.
  6. Insights

    3 Times the WTO Got It Right This Century

    Learn how the World Trade Organization (WTO) is facilitating landmark trade agreements that benefit both corporations and consumers.
  7. Retirement

    Petrobras Impact on the Brazilian Economy

    How the Petrobas scandal has shaken the Brazilian economy.
  8. Financial Advisor

    Is It Time To Buy The Solar Sector? (TAN, FSLR)

    The solar industry has grown rapidly in the last decade but faces major roadblocks in 2016.
  9. Retirement

    6 Things Retirees Should Know About Obamacare

    How will health insurance coverage change when you stop working? Here is a need-to-know short list of factors.
  10. Investing

    How Cheap is Affordable Housing Right Now?

    Learn how many affordable housing government programs work in the United States, including income requirements and the scarcity of affordable apartments.
  1. Gross Value Added - GVA

    A productivity metric that measures the difference between output ...
  2. Cost-Sharing Reductions

    A type of federal subsidy distributed as discounts that help ...
  3. Market Distortion

    An economic scenario that occurs when there is an intervention ...
  4. Export Incentives

    Export incentives are government programs that encourage a firm, ...
  5. Spending Phase

    The period in a person's life following retirement in which earning ...
  6. Advanced Premium Tax Credit

    A type of federal subsidy that reduces the amount individuals ...
Hot Definitions
  1. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  2. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  3. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  4. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
  5. Annuity

    An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income ...
  6. Restricted Stock Unit - RSU

    A restricted stock unit is a compensation issued by an employer to an employee in the form of company stock.
Trading Center