Governments provide subsidy to encourage specific economic activities or support the larger goals of the nation. They are usually offered as cash payments such as grants, tax breaks or low-interest, guaranteed loans. Subsidies can assist communities with low incomes to get access to healthcare, education or housing. They also can provide benefits for businesses, such as lower taxes and government purchases of their products.
Many critics of subsidy programs draw attention to the distorted incentives that result from these programs. They claim that subsidies encourage businesses to donate to political campaigns and to seek preferential treatment from the policymakers. They also note that subsidies can deter efficiency and innovation because they make businesses that depend on them less likely to invest in new technologies or modify their business model in order to meet the demands of consumers.
Whatever the reason, the effect of these subsidies is hard to calculate and contain significant costs that are not included in government projections. They could also impede more equitable and efficient public spending.
If governments offer subsidies to the production of energy, they see this here can lower the cost of solar panels for homeowners and also assist companies that sell these panels, by providing tax credits or cutting their costs. They can also encourage the consumption of services or goods, like by providing subsidies to families that pay some of their insurance premiums. A government could also encourage people to apply for federal loans by offering lower interest rates, deferred payments or flexible payment plans.