Subsidy

A subsidy is a grant or monetary gift given by a private person or entity (often a government) to another private person or entity, as financial assistance or to help launch an enterprise. Supporters of subsidies often justify their use as intended for some socially beneficial purpose, although economists point out that subsidies may often have socially detrimental effects.

Examples of subsidies include welfare and certain aspects of student loans.

A subsidy normally exemplifies the opposite of a tax, but can also be given using a reduction of the tax burden. This kind of subsidy are generally called tax expenditures.

Monetary policy as a systematic subsidy

Prevailing exchange rates may themselves be unfair and can be the cause of trade disputes and trade sanctions. For example at the moment China pegs its currency, the renminbi, to the US dollar, but it is being argued, not least by the United States, that this fixed exchange rate gives China an unfair pricing advantage in the United States (mainly because Chinese labour costs are enormously lower than those in the USA). A fixed exchange rate removes the possibility of trade imbalances (surpluses and deficits of trade) being adjusted via the exchange rate. China is arguing at the moment that volatility of it's exchange rate would add a dangerous element of instability into its still underdeveloped economy and financial system.

See also

• Agricultural policy
• cultural subsidy
• Copenhagen Consensus