One way that governments are able to impact the economic environment of a state or country is by using subsidies, which allow it to promote activities that it wants to increase, whether that be to make consumers act a certain way, or to promote certain sectors of the economy that are needed for the future. People think of subsidies as a form of the government directly giving money to a company or organization, but it is a bit more complicated than that. To put it simply, anything the government does to help an acting party directly profit or lower the cost of doing business is a subsidy. Here are several ways that the government is able to subsidize a business or industry…
Cash subsidies are the most straightforward form of subsidy, and represent how most people view subsidies. A cash subsidy occurs when the government gives a business or organization a direct sum of cash, usually in the form of a grant.
A common example of a cash subsidy today can be found in the renewable energy industry, where private companies aren’t quite able to invest in the necessary development to get the technology in that industry where it needs to be. Essentially, the government is gambling that renewable energy is the way of the future, and that it is beneficial for our society and economy to have public investiture to improve development in that sector.
Tax concessions are another common form of subsidy, which occur when the government acknowledges that it plans to take less money from a company, industry, or organization than it otherwise normally would. By decreasing the tax obligation of an acting party, the government has lowered their cost of doing business, and thusly improved their revenue and profits. Tax concessions are given to almost every business who meets certain hiring qualifications, or who are investing in their local economy (these are called tax incentives).
Assumptions of Risk
One controversial way that the government subsidizes some industries, such as the banking industry, is by taking the burden of risk that a company or industry would experience by acting in a certain way. An example of this is with loan guarantees, where the government offers to back the loan certain individuals who might not otherwise qualify for a loan.