Critical Thinking Governments sometimes provide price subsidies to specific indu
ID: 2494771 • Letter: C
Question
Critical Thinking Governments sometimes provide price subsidies to specific industries; that is, they reduce a domestic firm's costs so that it can sell products on the international market at a lower price. What reasons do governments (and politicians) use for these government subsidies? What are the benefits and disadvantages to domestic industries in the long run? To international customers? Who would benefit and who would lose if all price subsidies were eliminated? Do you feel that the U.S. government should or should not use price subsidies for some U.S. industries. do you feel that wav?Explanation / Answer
(10-25)
A subsidy will effectively lower the firm’s costs, such that the firm can pass on the benefit of the subsidy to the consumers in the form of lower price, both domestically and internationally.
The primary reason for such subsidies is that, sometimes domestic firms face unfair price competition from global firms, who can offer similar goods at lower prices. Therefore, by offering a subsidy, government enables domestic firms to compete at a global level.
In the long run, subsidized firm gain in the form of established global reputation and market share since they sell at competitive prices. That gives rise to sufficient accumulated profit. However, two biggest drawbacks are that, by getting subsidy year after year, firms start becoming inefficient, especially cost-inefficient. Secondly, they lose any incentive to innovate or engage in technological improvement in order to be cost efficient.
International customers, however, lose nothing if a country keeps subsidizing their domestic firms, as long as such customers can purchase the goods at globally competitive prices. The higher the number of global sellers, the higher choices the global consumers have.
If all price subsidies are eliminated, domestic firms who are cost inefficient and are disinclined to innovate will lose. They will not be able to compete globally and will lose their market share, as a result of which the domestic economy will suffer when export falls, thereby reducing aggregate demand and real GDP. The economy will slow down.
On the other hand, terminating subsidies will save the government huge sums of money which it can use for other constructive spending purposes which will help in the country’s long-run growth.
Price subsidy can be used for “Infant Industries” as a protection measure from cut-throat global competition. It should be used only on a temporal basis and not permanently. Prolonged subsidization creates inefficiency and is a waste on the taxpayers’ money, therefore, such subsidy should be offered only on a case-by-case basis and should be withdrawn as soon as the concerned industry or firm is out of its nascent stage, ready to cope up at a global platform.
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