A subsidy monies usually paid by a government to keep the price of a product or service low or to help a business or organization to continue to function.
A subsidy is a form of welfare support for particular sectors and industries of a nation’s economy. The idea is to assist struggling businesses by lowering the costs placed on them. Subsidies are also used to encourage new research and developments within an industry or sector. Usually, subsidies are the result of failures of a free market system to support individual segments of an economy. The problem is that subsidies can also affect the fairness of international trade deals.
A subsidy is a form of financial aid or support extended to an economic sector (or institution, business, or individual) generally with the aim of promoting economic and social policy. Although commonly extended from government, the term subsidy can relate to any type of support – for example from NGOs or as implicit subsidies. Subsidies come in various forms including: direct (cash grants, interest-free loans) and indirect (tax breaks, insurance, low-interest loans, accelerated depreciation, rent rebates).
Furthermore, they can be broad or narrow, legal or illegal, ethical or unethical. The most common forms of subsidies are those to the producer or the consumer. Producer/production subsidies ensure producers are better off by either supplying market price support, direct support, or payments to factors of production. Consumer/consumption subsidies commonly reduce the price of goods and services to the consumer. For example, in the US at one time it was cheaper to buy gasoline than bottled water.
Whether subsidies are positive or negative is typically a normative judgment. As a form of economic intervention, subsidies are inherently contrary to the market's demands. However, they can also be used as tools of political and corporate cronyism.