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an market prices or if it sells as lower than market prices, subsidies are implied.

Transfers and Subsidies

Transfers which are straight income supplements need to be distinguished from subsidies. An unconditional transfer to an individual would augment his income and would be distributed over the entire range of his expenditures. A subsidy however refers to a specific good, the relative price of which has been lowered because of the subsidy with a view to changing the consumption/ allocation decisions in favor of the subsidized goods. Even when subsidy is hundred percent, i.e. the good is supplied free of cost, it should be distinguished from an income-transfer (of an equivalent amount) which need not be spent exclusively on the subsidized good.

Mode of administering a subsidy

The various alternative modes of administering a subsidy are:

Subsidy to producers

Subsidy to consumers

Subsidy to producers of inputs

Production/sales through public enterprises

Cross-subsidization

Subsidy targeting

Subsidies can be distributed among individuals according to a set of selected criteria, e.g. 1) merit, 2) income-level, 3)social group etc. two types of errors arise if proper targeting is not done, i.e. exclusion errors and inclusion errors. In the former case, some of those who deserve to receive a subsidy are excluded, and in the latter case, some of those who do not deserve to receive subsidy get included in the subsidy programmed.

Effects of subsidies

Economic effects of subsidies can be broadly grouped into

Allocate effects: these relate to the sectored allocation of resources. Subsidies help draw more resources towards the subsidized sector

Redistributive effects: these generally depend upon the elasticity's of demands of the relevant groups for the subsidized good as well as the elasticity of supply of the same good and the mode of administering the subsidy.

Fiscal effects: subsidies have obvious fiscal effects since a large part of subsidies emanate from the budget. They directly increase fiscal deficits. Subsidies may also indirectly affect the budget adversely by drawing resources away from tax-yielding sectors towards sectors that may have a low tax-revenue potential.

Trade effects: a regulated price, which is substantially lower than the market clearing price, may reduce domestic supply and lead to an increase in imports. On the other hand, subsidies to domestic producers may enable them to offer internationally competitive prices, reducing imports or raising exports

Farm subsidy

It is money the government gives to farmers to help subsidies their farms. It is taxpayer money given to farmers to help keep the price of their goods lower.

While these funds were originally used to help the given to large corporate farmers and universities and colleges who engage in agricultural studies and production

Production subsidies

In certain cases (to encourage the development of a particular industry, for example), governments may provide direct production subsidies?cash payments for production of a given good or service. Frequently, production subsidies are easily identifiable