What is a Subsidy?

Definition: A subsidy is an economic contribution designed to promote a particular activity. In other words, it encourages the recipient to engage in a given endeavor that might not be attractive without this financial assistance.

What Does Subsidy Mean?

Subsidies are an economic mechanism employed to encourage companies and individuals to pursue some projects that are commonly unattractive because of adverse conditions. These supplements are used in very different situations depending on the nature of the problem being addressed. It is a practice mostly used by governments and big corporations and, in the case of governments, it might involve tax reductions.

Subsidies are mostly granted to either promote new ventures, to maintain profitability of crucial strategic businesses, to reduce market prices in order to keep the product accessible to society participants or to fund a given research project. These are just some examples of situations where a subsidy might be conceded but there are many other reasons depending on the aim of the entity that is granting it.

Here’s an example.

Example

Sustainable Farms LLC is an environmental research company that is currently working to increase the population of bees in the state of Ohio. The company artificially farms bees and then releases them in particular areas of the state to let them reproduce, therefore increasing the population artificially. Bees are crucial for the environment and the State of Ohio is interested in helping the company to expand its project to other areas of the state. Would this be possible through a subsidy?

According to our concept, a subsidy is an economic contribution provided to promote a particular activity. In this case, the State of Ohio can subsidy a part of the project by giving Sustainable Farms a sum of money to carry on with their activities. This subsidy will ensure that the project can expand itself to reach different places to keep increasing bee’s population in the entire state.