Governments provide subsidy to encourage certain economic activities, or to help achieve more general national goals. They are usually offered as cash payments, grants, tax breaks or even low-interest or guaranteed loans. Subsidies can help a disadvantaged community access education, healthcare or housing, or provide benefits to companies like lower taxes or the purchase of government-owned products.
Many critics of subsidies draw attention to the distortions in incentives they generate. They argue that subsidies create a mutually beneficial relationship between businesses and politicians and encourage them to give to campaigns and to demand a higher level of treatment from decision makers. They also argue that subsidies can hinder innovation and inefficiency since they make firms that rely on them less likely than others to invest in new technologies or adapt their business model to meet consumer demands.
No matter what the goal the impact of these subsidies can be hard to calculate and contain significant costs that are not evident in projections of the government. They could also crowd out more efficient public spending.
For instance when governments provide subsidies to energy production, they are able to make solar panels affordable for homeowners and aid companies who sell them by lowering the price of their products or providing tax credits. They can also encourage consumers to purchase of goods or services, for example, by offering subsidy to families who cover part of their insurance premiums. Similarly, a government can encourage people to take out federal student loans by offering them at low interest rates and offering perks such as deferment or flexible repayment schedules.