Subsidies are offered by governments to encourage certain economic activity or to help achieve larger national goals. They typically come in the form of cash payments, grants, tax breaks as well as low-interest guaranteed loans. Subsidies can help a disadvantaged community access education, healthcare, or housing, or they might give companies benefits such as lower taxes and the purchase of government-owned products.
Many critics of subsidies programs draw attention to the distortions in incentives they create. They claim that subsidies create a mutually beneficial relationship between politicians and businesses by encouraging them to make donations to campaigns and to demand a higher level of treatment from policymakers. They also argue that subsidies often discourage innovation and inefficiency, forcing companies that rely on them less likely to invest in the latest technology or modify their business model to satisfy consumer needs.
Regardless of the intended purpose the impact of these subsidies is hard to calculate and contain significant costs that are not projected by the government. They may also crowd out more equitable and efficient public spending.
When governments subsidize the production of energy, they can lower the price of solar panels for homeowners, and help companies who sell solar panels by providing tax credits or by lowering their costs. They can also encourage consumers to purchase of services or goods, for example, by offering subsidies to families that pay some of their insurance premiums. A similar way, the government can induce people to take out federal student loans by guaranteeing that they will be able to repay them at low rates and offering perks such as deferment or flexible repayment schedules.
