Abstract
Subsidies mean that the government pays for what would have been paid by consumers thus reducing the overall expenditure. Thus, subsidies have a far-reaching economic implication to the economy since it reduces the overall cost of production, besides stabilizing the prices of commodities within a reasonable limit. Indeed, high subsidy level means a lower cost of production. Moreover, allowing subsidies spurs economic growth since it lowers the operational expenses of production. Other consequential impacts associated with subsidies include improved living standard of the general public due to the overall affordability of commodities. On the other hand, a subsidy to most production processes implies higher spending by the government on most areas thereby escalating taxation rates in the country. It is worth noting that higher subsidy means immense taxation level since the citizens are the final bearers of the government projects. Meanwhile, the subsidy of the essential production process is necessary to an economy that is keen to grow and compete on a global scale as this essay will enumerate.
Introduction
In economics, a subsidy is defined as an accrued benefit, often given to citizens or groups or organizations by the government so as to relieve the taxation burden from them (Horn, 2013, pg 95). A subsidy is thus given as a relief to the general public so as to create some economic balance within society. Subsidies, therefore, mean that the government pays for what would have been paid by consumers thus reducing the overall cost of expenditure. Moreover, subsidies have both positive as well as adverse effects on the economic performance of any given country as they directly affect demand and supply curves.
Encourages Economic Growth
Subsidies reduce the cost of production thus promoting investments. In developing countries, for instance, the initial capital requirements for one to invest in such economics are usually high. Investments in such countries are characterized by a large number of taxation levels which turn out to be exorbitant especially to small and medium scale investors. In extreme cases, potential investors are discouraged from investing in such regions, but instead, invest in other regions with lighter taxation levels. It, therefore, implies that government subsidies, especially in the manufacturing and industrial sectors turn out to be a great incentive for investment. Increased investments, in turn, lead to increased job opportunities as well as additional revenue generation to the government and hence economic growth.
Improves Living Standards
Reducing the cost of production by way of offering subsidies reduces the market price/cost of commodities hence encouraging purchases in bulk. In some instances, companies within a given company might be forced to solely depend on the export market due to little local purchasing power. Exportation, however big the market might be, involves incurring extra expenditure, especially when moving goods of the trade from one country to another. Therefore, when the government subsidizes such production processes, the overall cost of finished products goes down (Grossman, & Rogoff, 1995). This, in turn, improves the cost of living amongst citizens. In fact, in most young and growing economies, subsidies have been used as incentives to boost local purchasing power.
Increased Government Spending
Increased subsidies imply that the government will have to incur extra costs than the initial budget thus increasing the overall public expenditure. In fact, if not well executed, continuous government subsidies might easily drive the country into borrowing so as to sustain its subsidiary budget (Carbaugh, 2009). Subsidies in most cases are implemented as remedial strategies or correctional measures to maintain an equally developing economy. As a result, therefore, most subsidies are prompted by certain forces within the economy which are hardly predictable. Hence, all subsidies are not catered for when drafting a national budget. If there is need to offer subsidies, then the government might be forced to dig deeper into its reserves to meet the growing needs. Such instances, in turn, leave nothing for investment into other development projects.
Illegitimate Distribution
Certain factors that necessitate subsidies are neither universal nor common in all parts. For example, a particular region of a country might be hit hard by natural catastrophes such as drought, floods or even hurricanes. In such scenarios, the government might be forced to subsidize some of the essential commodities as a way of helping the citizens resume their traditional livelihoods. This leaves a leeway for scrupulous administrators to distribute such subsidies in a skewed manner in a way to benefit them. In the height of corruption, certain individuals might create non-existent forces that prompt subsidization only to pocket lump sum amounts in their pockets (Grossman, & Rogoff, 1995). Subsidies, if any, should, therefore, be evenly distributed across the economy so as to avoid cases of illegal distribution of the same government subsidies.
Increased Taxation
Increased taxation is one of the adverse effects of government subsidies. As earlier on pointed out, subsidies are at times necessary economic policies that must be implemented. Since they are not budgeted for, the government may opt to increase taxation in some quotas so as to create sufficient funds to subsidize some essential commodities. Huge multinational corporations which own huge market segments have in most cases been victims of such unintended increase in taxes. Although most governments would resort to greater taxation as the last option, it has happened in most countries, especially in cases where subsidies are not government driven but demanded by the citizens.
Conclusion
Although subsidies might have more disadvantages than advantages on the economy, they should be checked and limited to a certain level beyond which the government cannot offer any more. In other words, subsidies should not be implemented as natural remedies whenever the economy seems to take a skewed appearance but instead should only be applied when it is inevitable. The above statement is not meant to portray subsidies as economy growth detractors but rather an emphasis that there should be a solid balance between government spending and subsidies to avoid any unwanted subsidies.
References
Carbaugh, R. J. (2009). International economics. Mason, Ohio: South-Western Cengage Learning.
Grossman, G. M., & Rogoff, K. (1995). Handbook of international economics: Volume 3. Amsterdam: North Holland.
Horn, H., & Mavroidis, P. C. (2013). Legal and economic principles of world trade law. New York, NY [u.a.: Cambridge Univ. Press.
