How Government Subsidies Hurt Economic Growth. Research Paper

Research Paper
Mathematics and Economists
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Institution
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RESEARCH PAPER
Abstract
Government subsidy means that a government pays part of the cost. Subsidies are very beneficial to businesses, individuals, and institutions. Government subsidy removes a certain type of burden and it is termed to be in the overall interest of the public because it promotes economic policies and social, good. Government subsidies can be in the form of tax reduction or cash payment. Sometimes subsidies support the economy of a country by assisting some of the industries that are struggling. Subsidies also support new developments in the economy by making funds available to different sectors in the economy. In the United States, there are two common categories of individual subsidies. They include unemployment benefits and payments of welfare. Additionally, the Affordable Care Act in the United States makes certain families in America Eligible for healthcare subsidies.
Existing evidence claims that government subsides stimulates the growth of businesses and the economy. However, most studies suggest that government subsidies increase expenditure as a result of increased wages. Although policymakers will always try to argue on the need for subsidies in the economy, these programs distort the economy in the long run. In case the government will intervene all the subsidized firms may get an unjust competitive advantage over companies that do not get a government subsidy. Additionally, policymakers will always pick the winners and the losers in the economy instead of the market itself. The case of government subsidy on the prices of gasoline in Venezuela is a perfect example of how government subsidies can harm the economy. This paper will examine how government subsidies hurt the economy in terms of employment, demand, and supply of goods, tax revenue, and the prices of commodities. The paper concludes that government subsidies have negative effects on the growth of the economy of any nation.
Introduction
In developed and developing countries, the government has adopted a wide range of policies that trigger economic growth. These policies include tax incentives and government grants. A subsidy means that the government is part of a certain payment or cost. For example, the government can decide to give farmers a subsidy of $20 for every kilo of carrots. In such a scenario this type of approach by the government will make the supply curve shift to the right while the demand for goods will increase because of low prices. However, government subsidies have a lot of disadvantages because sometimes it can be very hard for the government to raise a significant amount of taxable income. This means that people will be taxed more than they can produce economically. Through government subsidies, producers always set high prices for their commodities. This makes the economy less competitive because goods are extremely expensive for consumers. Additionally. Government subsidies reduce the incentive for some companies to reduce costs. While government subsidies assist consumers to purchase goods at low prices, there are a lot of disadvantages government subsidies have on the economy.
How Government Subsidies Hurt Economic Growth
Government subsidies are bad for global competition. The main goal or objective of any government in developed and developing countries is promoting fairness and economic competitiveness in all the sectors. Subsidies make goods and services very cheap to produce than in foreign markets. As a result, domestic prices reduces while the price of foreign goods increase. This reduces imports of a given country. The world is a global community that values competition and fairness in international markets. The idea that governs that International trade was developed to equalize the world playing field and enhance fair competition among different countries benefits the consumers and encourages innovation. However, there some government that subsidizes some companies and domestic industries to help them in the competition. This can happen because of different reasons that in the long run consumers and other businesses get affected negatively. Government subsidies come in different sizes and shapes. Although there are strategies that have been developed to reduce the support of the government that alters, government subsidies amount to billions of money spent by a country every year to subsidize certain companies and businesses. This means that money comes from the taxpayers yet this money could be used in other projects funding of pensions for the old people, or development of improved education systems. This money could help in solving other issues affecting the country. Some subsidies like doping in sports include cheap loans, direct grants, subsidized inputs, and tax breaks. In such circumstances, any nation will be compelled to take such measures. Government subsidies hurt the economy because innovations will be discouraged.[Pettinger, Tejvan. Cracking Economics] [Hague, Katherine. Funded: The Entrepreneur's Guide to Raising Your First Round.] [Dorward, Andrew, and Ephraim Chirwa. Agricultural Input Subsidies: The Recent Malawi Experience.]
In some developing countries, government subsidies make a lot of changes to the prices of goods like oil and gasoline. When there are direct subsidies in the producers of certain commodities in the market, the producer might experience a shortfall on the accessibility of such goods. Sometimes the government can choose to control the prices of basic goods so that the less fortunate in urban centers can afford such goods. This kind of government subsidy is common in developing countries because a large number of employees have low income. In this case, the government will adopt a subsidy that will keep the prices relatively low so that the poor can purchase such goods. In some nations like Mexico, Egypt, and other nations the price of goods like sugar, cooking oil, and sugar has always been on the control of the government. The effects of government controlling the prices is shortage. In some countries like Venezuela, the price of gasoline has been very low. The exchange rate of gasoline in Venezuela is cheaper than that of the United States. The subsidy that was enacted in Venezuela created a big difference between the domestic price of gasoline and the foreign price of gasoline. One of the main effects of gasoline being cheap in Venezuela is smuggling from countries like Colombia where gasoline has not been subsidized. The reason why this policy was enacted by the government was to assist poor people including rich people. People earn revenue from the sale of gasoline in the market. However, since the government had spent a lot of money on subsidizing gasoline, it has been unable to spend money on important investment projects like infrastructure. The government has also limited its expenditure on important services like controlling crime. Through this illustration, it is evident that government subsidies limit the ability of the government to promote economic development. Since the government spends a lot of money on subsidizing commodities, it becomes hard for the economy to develop because there are no investments. This also contributes to budget deficits. Further, due to low revenue from the sale of goods that are low priced, producers might decide not to invest more in production. For example, in the case, if gasoline in Venezuela, some of the oil refineries cannot invest sufficiently in the expansion of their operations to other parts of the country. Therefore government subsidies are harmful to economic growth and appropriate allocation of resources in a country. For example, in the case of Venezuela, petty traders have increased so do the illegal business. These traders could spend their time producing goods and services and this in return will increase the national output of the country.[Pettinger, Tejvan. Cracking Economics] [Blazev, Anco S. Global Energy Market Trends.] [Pettinger, Tejvan. Cracking Economics]
Government subsidies increase the tax revenue of a country because they are very expensive. All government subsidies come with some hidden costs of taxation. In the long run, citizens will be required to pay higher taxes so that th...