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Essay On Subsidy

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Subsidy plays very important role in the economic development of any country. It brings out desired changes by stabilizing the price of essential good & services, optimum allocation of resources, redistribution of income in favor of poor people and thus achieving both the objective growth & of the equity of nation. Subsidy is used to modify market outcomes, especially to take account of positive externalities, and, thus promote certain well-defined redistributive objectives. Prest [1974] had studied in his paper that economists have not settled upon a commonly acceptable definition of subsidy. Shrivastava D.K. et. al. (2003) had studied that subsidy in Indian context creates adverse effect on an overall economic development. Ghosh A. et. …show more content…

This paper also studies that when the market is in a perfectly competitive equilibrium, a subsidy increases the supply of the good beyond the equilibrium competitive quantity. A Subsidy lowers the price of goods in a country providing subsidy to its citizens and thus makes these goods more competitive against foreign goods, thereby reducing foreign competition. As a result, receive lower prices for their products in the global market and discourage these countries not to engage in foreign trade. This subsidy policy of the government creates trade barriers in order to protect domestic industries and it is considered as protectionism. The problem with protectionism arises when industries are selected for a reason rather than to gain a comparative advantage by providing subsidy. This kind of market distortion, and reduction in social welfare, is the reason behind the World Bank policy for the removal of subsidies in developing countries. Subsidy may provide immediate benefits to a country or an industry, but in the long-run it may prove unethical and has negative effects on the world economy. Subsidies are not doubt intended to support public welfare; however, they violate legal principles and thus leads to higher consumer prices or discriminate against some countries or producers to benefit

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