Subsidy, another term for subvention, is financial assistance or support given to a specific economic sector.
Usually, subsidies are provided by the government as a preventive measure for the downfall of a specific industry.
The government also pays subsidies when there is a price increase in that particular industry, or if the government wants more laborers to be hired.
It is more common to hear of subsidies provided for laborers, agriculture, housing, and other industries. On the other hand, subsidies given to the arts or cultural sector are not as controversial, and are commonly given when there is insufficient support from the private sector.
Subsidies are protectionist and serve as trade barriers because they work in favor of strengthening domestic commodities and services. As such, they may cause market distortion.
This is the case, particularly in first world countries where farm subsidies are prioritized. Because of this, surplus commodities are then dumped in developing countries, thus becoming a burden to struggling farmers overwhelmed by the influx of foreign produce. Free market advocates, who believe that the government must not intervene in market activity, claim that subsidies are more harmful than beneficial.
The most recognized example of this would probably be that of the European Union. The EU’s Common Agricultural Policy takes up nearly half of the Union’s budget and aims to provide a good standard of living for farmers, promote agricultural productivity, and ensure food security.
While it is able to meet its targets to a certain extent, there have also been drawbacks. The subsidies have caused an oversupply of produce in Europe, while at the same time stifling smaller farmers and indirectly causing environmental problems with the increase in use of certain fertilizers and pesticides.
Subsidies can come in the form of direct funding, tax exemptions, and other methods of creating favorable conditions.