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Key Takeaways A subsidy is a direct or indirect payment to individuals or firms, usually in the form of a cash payment from the government or a targeted tax cut. In economic theory, subsidies can be used to offset market failures and externalities to achieve greater economic efficiency.

Disadvantages of Subsidies Shortage of supply. Though one of the advantages of subsidies is the greater supply of goods, a shortage of supply can also occur. ... Difficulty in measuring success. Subsidies are usually effective and helpful. ... Higher taxes. How will the government raise funds to use for subsidizing industries?

Free market economists are wary of subsidies for a variety of reasons. Some argue that subsidies unnecessarily distort markets, preventing efficient outcomes and diverting resources from more productive uses to less productive ones.

Definition: Subsidy is a transfer of money from the government to an entity. It leads to a fall in the price of the subsidised product. Description: The objective of subsidy is to bolster the welfare of the society. It is a part of non-plan expenditure of the government.

Potential supply shortages: Because a subsidy of a particular product causes prices to go down and demand to go up, this may lead to product shortages and economic scarcity if companies can't meet customer demands.

Increased spending on subsidies is compensated by increased taxes and lower government spending. Sometimes government also prints more currency to pay for subsidies. The entire alternative to nurture subsides are only detrimental to economy. When taxes goes-up, people purchasing power go down.

Firstly, governments may pay much higher prices for the agricultural products than what the farmers can obtain under free market environment, and. Secondly, by supplying the inputs at a price that is below the cost of supplying these inputs or below at the price that would prevail in an open free trade environment.