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.
Increasing Production and Consumption
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 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.
The Bottom Line
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.