Subsidy - What is it? characteristics, types, and examples

Subsidy - What is it? characteristics, types, and examples
Posted on 09-03-2022

Subsidy

Aid granted by official organizations.

What are subsidies?

Subsidies are aid granted by official organizations, whose purpose is to provide social assistance or promote the demand for a specific good or service. These aids are carried out in the general interest to provide collective resources in the face of certain situations in the community, such as social vulnerability.

Subsidies by the State may have the objective of promoting the demand for a certain productive activity; For example, the State can grant this assistance to people whose economic or social conditions do not allow them to have access to a university, and in this way, sufficient economic resources are assigned to carry out said academic activity.

In the same way, the State also grants these subsidies to provide help to certain groups, for example by granting aid to meet primary needs, such as access to the basic food basket, essential services, or access to housing.

Characteristics of the subsidies

The main characteristics of the subsidies are the following:

  • They have an economic character.
  • Their objective is to help a group or promote the demand of a specific product sector.
  • The resources they use are part of public spending.
  • They are awarded by official organizations.
  • The beneficiary has the duty to use the resources granted in the correct and agreed manner, otherwise, the State has the absolute power to revoke said assigned resources.

Types of subsidies

Subsidies can be divided between direct and indirect subsidies.

direct subsidies

Those contributions of money are granted directly to a certain recipient. Within direct subsidies we find the following types:

  • Import subsidy: provision of resources in the market granted in order to encourage imports.
  • Export subsidy: provision of resources for product export activities.
  • Transport subsidy: contribution of resources granted to public transport (buses, trains, and even public airports), in order to optimize the mobility of society in general.
  • Basic needs subsidies: contribution of resources granted to the benefactor for the acquisition of basic goods or services, for example, basic goods and services or access to the basic food basket.

indirect subsidies

Those contributions of money are not granted directly to the beneficiary, but nevertheless, benefit him indirectly. Within indirect subsidies we find the following types:

  • Subsidies in kind: provision of resources that aims to promote the public interest. This grants resources to third parties in order to benefit certain recipients, such as those study grants in which the government pays educational organizations, but it is the student who receives the benefits.
  • Cross subsidies s: mechanism by which a low price strategy is financed. It consists of taking the profits achieved by a good or service that serve to cover the losses of another.
  • Tax Benefits – A popular type of indirect subsidy that corresponds to a change in the tax code. Governments can design tax policies that significantly reduce the tax burden for anyone who meets certain requirements. In these cases, a legislator may have a particular industry or constituency, although the benefit is generally neutral. Governments build tax breaks, credits, and tax deferrals that can benefit communities. For example, the establishment of a business empowerment zone is a type of indirect subsidy provided to businesses located in a low-income geographic area, through special benefits to stimulate the local economy.

Subsidy Examples

Some examples of subsidies are as follows:

  • Manolo receives an unemployment benefit since he is currently without a job.
  • Sandra is a beneficiary of the housing subsidy program granted in her locality.
  • Natalia receives an education grant to pursue university studies.

 

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