What Is a Subsidy?

A subsidy is a benefit given to an individual, business, or institution, usually by the government. It can be
direct (such as cash payments) or indirect (such as tax breaks). 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, given to
promote a social good or an economic policy.

KEY TAKEAWAYS

A subsidy is a direct or indirect payment to individuals or firms, usually in the form of a cash payment
from the government or a targeted tax cut.

In economic theory, subsidies can be used to offset market failures and externalities to achieve greater
economic efficiency.

However, critics of subsidies point to problems with calculating optimal subsidies, overcoming unseen
costs, and preventing political incentives from making subsidies more burdensome than they are
beneficial.

How a Subsidy Works

A subsidy is generally some form of payment—provided directly or indirectly—to the receiving

individual or business entity. Subsidies are generally seen as a privileged type of financial aid, as they
lessen an associated burden that was previously levied against the receiver, or promote a particular
action by providing financial support.

Subsidies have an opportunity cost. Consider again the Depression Era agricultural subsidy: it had very
visible effects and farmers saw profits rise and hired more workers. The invisible costs included what
would have happened with all of those dollars without the subsidy. Money from the subsidies had to be
taxed from individual income, and consumers were hit again when they faced higher food prices at the
grocery store.

Types of Subsidies

A subsidy typically supports particular sectors of a nation’s economy. It can assist struggling industries 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 maybe undercut by activities in rival economies.

Direct vs. Indirect Subsidies

Direct subsidies are those that involve an actual payment of funds toward a particular individual, group,
or industry. Indirect subsidies are those that do not hold a predetermined monetary value or involve
actual cash outlays. They 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 in savings for those the subsidy is designed to help.

Government Subsidies

There are many forms of subsidies given out by the government. Two of the most common types of
individual subsidies are welfare payments and unemployment benefits. The objective of these types of
subsidies is to help people who are temporarily suffering economically. Other subsidies, such as
subsidized interest rates on student loans, are given to encourage people to further their education.

With the enactment of the Affordable Care Act (ACA), several U.S. families became eligible for subsidies,
based on household income and size.1 These subsidies are designed to lower the out-of-pocket costs for
insurance premiums. 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.

Subsidies to businesses are given to support an industry that is struggling against international
competition that has lowered prices, such that the domestic business is not profitable without the
subsidy. Historically, the vast majority of subsidies in the United States have gone towards four
industries: agriculture, financial institutions, oil companies, and utility companies.

Advantages and Disadvantages of Subsidies

Different rationales exist for the provision of public subsidies: some are economic, some are political,
and some come from socio-economic development theory. Development theory suggests that some
industries need protection from external competition to maximize domestic benefit.

Technically speaking, a free market economy is free of subsidies; introducing one transforms it into a
mixed economy. Economists and policymakers often debate the merits of subsidies, and by extension,
the degree to which an economy should be a mixed one.

Types of Subsidies
A subsidy typically supports particular sectors of a nation’s economy. It can assist struggling industries 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 maybe undercut by activities in rival economies.

Direct vs. Indirect Subsidies

Direct subsidies are those that involve an actual payment of funds toward a particular individual, group,
or industry. Indirect subsidies are those that do not hold a predetermined monetary value or involve
actual cash outlays. They 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 in savings for those the subsidy is designed to help.

Government Subsidies

There are many forms of subsidies given out by the government. Two of the most common types of
individual subsidies are welfare payments and unemployment benefits. The objective of these types of
subsidies is to help people who are temporarily suffering economically. Other subsidies, such as
subsidized interest rates on student loans, are given to encourage people to further their education.

With the enactment of the Affordable Care Act (ACA), several U.S. families became eligible for subsidies,
based on household income and size.1 These subsidies are designed to lower the out-of-pocket costs for
insurance premiums. 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.

Subsidies to businesses are given to support an industry that is struggling against international
competition that has lowered prices, such that the domestic business is not profitable without the
subsidy. Historically, the vast majority of subsidies in the United States have gone towards four
industries: agriculture, financial institutions, oil companies, and utility companies.

Advantages and Disadvantages of Subsidies

Different rationales exist for the provision of public subsidies: some are economic, some are political,
and some come from socio-economic development theory. Development theory suggests that some
industries need protection from external competition to maximize domestic benefit.
Technically speaking, a free market economy is free of subsidies; introducing one transforms it into a
mixed economy. Economists and policymakers often debate the merits of subsidies, and by extension,
the degree to which an economy should be a mixed one.

Advantages

Pro-subsidy economists argue that subsidies to particular industries are vital to helping support
businesses and the jobs they create. Economists who promote a mixed economy often argue that
subsidies are justifiable to provide the socially optimal level of goods and services which will lead to
economic efficiency.

In contemporary neoclassical economic models, there are circumstances where the actual supply of a
good or service falls below the theoretical equilibrium level—an unwanted shortage, which creates what
economists call a market failure.

One form of correcting this imbalance is to subsidize the good or service being undersupplied. The
subsidy lowers the cost for the producers to bring the good or service to market. If the right level of
subsidization is provided, all other things being equal, the market failure should be corrected.

In other words, according to general equilibrium theory, subsidies are necessary when a market failure
causes too little production in a specific area. They would theoretically push production back up to
optimal levels.

Some say goods or services provide what economists call positive externalities. A positive externality is
achieved whenever an economic activity provides an indirect benefit to a third party.

However, because the third party does not directly enter into the decision, the activity will only occur to
the extent that it directly benefits those directly involved, leaving potential social gains on the table.
Many subsidies are implemented to encourage activities that produce positive externalities that might
not otherwise be provided at the socially optimal threshold. The counterpart of this kind of subsidy is to
tax activities that produce negative externalities.

Some theories of development argue that the governments of less-developed countries should
subsidize domestic industries in their infancy to protect them from international competition. This is a
popular technique seen in China and various South American nations currently.

Disadvantages

Meanwhile, other economists feel free market forces should determine if a business survives or fails. If it
fails, those resources are allocated to more efficient and profitable use. They argue that subsidies to
these businesses simply sustain an inefficient allocation of resources.

Free market economists are wary of subsidies for a variety of reasons. Some argue that subsidies
unnecessarily distort markets, preventing efficient outcomes and diverting resources from more
productive uses to less productive ones.

Similar concerns come from those who suggest economic calculation is too inexact and microeconomic
models are too unrealistic to ever correctly calculate the impact of market failure. Others suggest that
government spending on subsidies is never as effective as government projections claim it will be. The
costs and unintended consequences of applying subsidies are rarely worth it, they claim.

Another problem, antagonists point out, is that the act of subsidizing helps corrupt the political process.
According to political theories of regulatory capture and rent-seeking, subsidies exist as part of an
unholy alliance between big business and the state. Companies often turn to the government to shield
themselves from the competition. In turn, businesses donate to politicians or promise them benefits
after their political careers.

Even if a subsidy is created with good intentions, without any conspiracy or self-seeking, it raises the
profits of those receiving beneficial treatment, and so creates an incentive to lobby for its continuance,
even after the need or its usefulness runs out. This potentially allows political and business interests to
create a mutual benefit at the expense of taxpayers and/or competitive firms or industries.

Special Considerations

There are a few different ways to evaluate the success of government subsidies. Most economists
consider a subsidy a failure if it fails to improve the overall economy. Policymakers, however, might still
consider it a success if it helps achieve a different objective. Most subsidies are long-term failures in the
economic sense but still achieve cultural or political goals.

An example of these competing evaluations could be seen in the Great Depression. Presidents Hoover
and Roosevelt both set price floors on agricultural products and paid farmers to not produce. Their
policy goal was to stop food prices from falling and to protect small farmers. To this extent, the subsidy
was a success.2

But the economic effect was quite different. Artificially high food prices lowered the standard of living
for consumers and forced people to spend more on food than they otherwise would have. Those
outside of the farm industry were worse off in absolute economic terms.3

Sometimes subsidies may appear to have ran their course or continue to create an artificial market, but
there are other factors that keep them in place. Production subsidies by G20 countries averaged $290
billion per year from 2017 to 2019, with 95% going toward oil and gas. Meanwhile, 2019 global
consumption subsidies were $320 billion, driven largely by oil and gas.

The combination of production of consumption subsidies in the oil and gas industry creases
overconsumption by artificially lowering the price of fossil fuels. However, these subsidies (on both the
production and consumption side) have lots of political and systemic support and pushback from
consumer and energy companies that would be impacted if reform did happen.4

In terms of pragmatic political economy, a subsidy is successful from the point of view of its proponents
if it succeeds in transferring wealth to its beneficiaries and contributing to the re-election of its political
backers.

The strongest advocates of subsidies tend to be those who directly or indirectly gain from them, and the
political incentive to "bring home the bacon" to secure support from special interests is a powerful lure
for politicians and policymakers.

What Is the Difference Between Direct and Indirect Subsidies?

Direct subsidies are those that involve an actual payment of funds toward a particular individual, group,
or industry. Indirect subsidies are those that do not hold a predetermined monetary value or involve
actual cash outlays. These can include activities such as price reductions for required goods or services
that can be government-supported.

What Is the Position of Subsidy Advocates?

Subsidies exist in mixed economies. Proponents argue that subsidies to particular industries are vital to
helping support businesses and the jobs they create. They further contend that subsidies are justifiable
to provide the socially optimal level of goods and services which will lead to economic efficiency.

What Is the Position of Subsidy Opponents?

Technically speaking, a free market economy is free of subsidies. Subsidy opponents feel free to market
forces should determine if a business survives or fails. If it fails, those resources will be allocated to more
efficient and profitable use. They argue that subsidies unnecessarily distort markets, preventing efficient
outcomes as resources are diverted from more productive uses to less productive ones

Gov’t subsidy to PhilHealth hits record-high in 2022

By: Ben O. de Vera - 2 months ago

PhilHealth subsidies hit record-high in 2022 despite smaller financial support to GOCC sector

PHOTO: PhilHealth website

MANILA, Philippines—Amid the prolonged COVID-19 pandemic, the state-run Philippine Health
Insurance Corp. (PhilHealth) received its biggest-ever annual subsidy amounting to P80.9 billion in 2021.

It was despite the latest Bureau of the Treasury (BTr) data showing that the total subsidy given by the
national government to government-owned and/or -controlled corporations (GOCCs) last year fell by
nearly a fifth to P184.8 billion from the record-high P229 billion in 2020.

The government subsidized wages of workers in badly hit small businesses and gave cash aid to
vulnerable sectors at the height of the most stringent COVID-19 lockdown imposed two years ago.
Since 2014, PhilHealth has been receiving the largest amount of yearly subsidy in the GOCC sector. The
P5.02-trillion 2022 national budget had set aside P80 billion for PhilHealth to cover premium subsidies
for indirect contributors with the implementation of the universal health care (UHC) program covering
all Filipinos in full swing.

Last year, Finance Secretary Carlos Dominguez III said the national government’s subsidy would allow
PhilHealth to disburse members’ medical coverage despite lower contributions due to tougher times
wrought by the pandemic yet higher disbursements to those who got sick or died of COVID-19.

The latest data on its website showed that as of end-June 2021, PhilHealth covered 94.79 million
Filipinos, of which 52.53 million were members (31.18 million direct contributors, as well as 21.35
million indirect contributors among indigents and senior citizens), plus 42.27 million of their
dependents.

Also last year, think tank Fitch Solutions warned that “due to diversion of health care funds [to COVID-19
response], PhilHealth might not meet the medical coverage goal,” but Dominguez had assured that the
state-run health insurer’s reserve fund, which stood at P164.1 billion in mid-2021, could cover UHC
requirements despite it also struggling to pay off debts.

In 2019 or before the COVID-19 pandemic struck, President Rodrigo Duterte signed Republic Act (RA)
No. 11223 or the UHC Act to automatically enroll all Filipinos in the national health insurance program
being implemented by PhilHealth.

Even pre-pandemic, PhilHealth had also been mired in a string of controversies due to some top officials’
alleged fund misuse.

Aside from PhilHealth, the other GOCCs that got the biggest subsidies last year included the National
Irrigation Administration (NIA), with P38.3 billion; and the National Housing Authority (NHA), P25.7
billion.

Up to 90 percent of subsidies that state-run corporations receive were being spent on priority programs
and projects, while the rest covered operational expenses, according to the Governance Commission for
GOCCs (GCG).
Besides subsidies, the national government also extends equity and net lending support to GOCCs.