The Disadvantages of Government Subsidies

Government subsidies are government payoffs aimed at keeping prices lower than market value. Sometimes the government promotes lower-than-market prices by reducing a business’s tax burden on products or labor. While government subsidies can help certain favored industries to gain additional business and help consumers to obtain products at lower prices, there are also many disadvantages of government subsidies that must be taken into account.

Product Shortages

When the government subsidizes a particular product, it causes the price to go down and consumption to go up. While this will help consumers initially because of the reduction in price, it also has the effect of leading to shortages because producers have trouble keeping up with the sudden rise in demand. This can be an unfortunate development for consumers who cannot find the product in their area due to overconsumption and product shortages. These consumers cannot buy the product at the lower price or the original market price.

Difficult to Measure Success

One of the greatest advantages of a government subsidy is that it can limit what economists call negative externalities. Subsidies can reduce the negative externality of pollution, for instance, by supporting public transportation. However, one drawback of these subsidies is that it is difficult to measure their positive externalities to quantify the extent of their success. Although they may have extremely positive benefits, the government will have a difficult time measuring the success of subsidies to make an informed decision about their future implementation.

Inefficient Transfer to Recipients

The money from government subsidies does not always make its way to the intended recipients. Although some of the money is likely to make a difference in people’s lives, a sizable amount tends to go to other places. In a 2010 report by the Organisation for Economic Co-operation and Development called “The Use of Input Subsidies in Developing Countries,” OECD analysts found that less than half the value of an input subsidy in developing countries actually translates into any improvement in net incomes for agricultural households. The majority of the money is instead transferred to suppliers or lost due to inefficiency, according to the analysts.

Higher Taxes

Governments cannot give money to certain industries, businesses or people without first taxing citizens to obtain the money. This means that all government subsidies come with the hidden cost of taxation. Ultimately, taxpayers will have to pay higher taxes in order to fund government subsidy programs.