Subsidy and its effects

Abstract

Governments follow a subsidy policy to encourage the use of certain goods by some consumers. Subsidy can be explained as also that firms-producers sell the determined goods at a cheaper price than the market price and subsidizing government collects the difference. They are tools which are widely used in the hands of governments and can be allocated to various economic issues. In general, it is used as a policy of price policy and anti-inflationary policy in the classical sense. In the modern sense, it used for the purpose of general equilibrium, in other words, to equalize trade balance such as lowering prices and controlling inflation, preventing the long-term decline of industries. However, there are many significant negative effects of subsidies such as increase in taxes, leading to inefficiency of local industries, increase in borrowing, and disruption of identity between buyer and vendor prices in markets. One of rules set on subsidies is SCM Agreement. In the Agreement, subsidies were identified and rules were set on subsidies which could impact international trade. Since there are many types of subsidies, there should be more strict rules and policies about their implementation in order to eliminate and avoid potential barriers in international trade.