Critical Thinking Governments sometimes provide price subsidies to specific indu
ID: 461828 • Letter: C
Question
Critical Thinking Governments sometimes provide price subsidies to specific industries; that is, they reduce a domestic firm's costs so that it can sell products on the international market at a lower price. What reasons do governments (and politicians) use for these government subsidies? What are the benefits and disadvantages to domestic industries in the long run? To international customers? Who would benefit and who would lose if all price subsidies were eliminated? Do you feel that the U.S. government should or should not use price subsidies for some U.S. industries? Why do you feel that way?Explanation / Answer
Reason for government subsidies:
To embolden production and consumption, in specific industries. Some reason can be to avoid economic “market failure” or encourage use of the product (new) e.g. solar panels, which will ultimately reduce burden on the crude oil, coal etc., thereby reducing the dependency of the depleting commodity (by reducing its demand) or in order to conserve a traditional old product, which is linked to countries culture and fame.
Benefits & Disadvantages:
Subsidies aid an industry to produce more goods and services therefore increasing the supply (and demand) of the goods, and eventually reducing the overall price.
For local or for international markets, the subsidy is advantageous, if the markets is driven only by government owned goods e.g. LPG in developing countries. For others, it may lead to fall of competitive alternative goods and businesses.
International consumers get benefited by the subsidized goods imported, but it may hamper the government of the importing country, economy and the local (International) markets. Importing government sometimes control the same, by introducing high import taxes on such good, in order to help the local markets and businesses to compete.
Often, it is difficult to assess how much and till what time the subsidy is beneficial and when it starts gratuitously misleading the markets & create a false supply - demand equation and can have very adverse effects.
If the subsidies are closed for a particular commodity, the costs will go high, affecting the consumers (negatively) and the businesses. Local businesses may get the initial boost with the same, but due to higher cost (and if alternatives are available) the consumer will shift to other goods, therefore reducing the demand.
US or any other government should use price subsidies, only when there is an economical requirement e.g. market failure or international competition which will deplete the local markets. Otherwise, for developed countries like the US with mature local markets and high consumer purchasing power, subsidies doesn’t have much significance.
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