Disadvantages of Subsidies

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Disadvantages of Subsidies * Is expensive and will require higher taxes. * Difficult to estimate the extent of the positive externality * Giving subsidies to firms may encourage inefficiency, because the firms can rely on government aid. * Govt Failure: The govt may have poor information about the service and how much to subsidise. Economic Arguments against Subsidies * The economic and social case for a subsidy should be judged carefully on the grounds of efficiencyand fairness * Might the money used up in subsidy payments be better spent elsewhere? * Government subsidies inevitably carry an opportunity cost and in the long run there might be better ways of providing financial support to producers and workers in specific industries. Free market economists argue that subsidies distort the working of the free market mechanism and can lead to government failure where intervention leads to a worse distribution of resources. * Distortion of the Market: Subsidies distort market prices – for example, export subsidiesdistort the trade in goods and services and can curtail the ability of ELDCs to compete in the markets of rich nations. * Arbitrary Assistance: Decisions about who receives a subsidy can be arbitrary * Financial Cost: Subsidies can become expensive – note the opportunity cost! * Who pays and who benefits? The final cost of a subsidy usually falls on consumers (or tax-payers) who themselves may have derived no benefit from the subsidy. * Encouraging inefficiency: Subsidy can artificially protect inefficient firms who need to restructure – i.e. it delays much needed reforms. * Risk of Fraud: Ever-present risk of fraud when allocating subsidy payments. * There are alternatives: It may be possible to achieve the objectives of subsidies by alternative means which have less distorting

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