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Benefits and Costs of Subsidies

The purpose of government subsidies is to encourage activities that are deemed to have positive spillovers. A professional sports team, for example, is thought to increase tax revenues and increased demand for local businesses.

Choose to discuss another good or service for which government provides a subsidy. Include each of the following in your initial post.

1. Describe the subsidy program and explain what spillovers are generated from the subsidy.

2. Explain how both consumer and producer surplus will be affected by the subsidy. Will they increase or decrease?

3. Who are the winners (i.e. increased surplus) and losers (loss of surplus) that result from the subsidy? Remember that there are always trade-offs, and therefore, someone must be the loser.

Try not to choose an item that a classmate has already discussed. In your responses to classmates, help them identify other possible spillovers.

Solution Preview

A good example of subsidized public good is the public highway system. Highways are subsidized by Federal Government funds, paid for by taxes. A great free highway system is vital for a modern economy because easy convenient transportation is vital to the movement of goods from suppliers to consumers and for citizens to commute to work, go on a vacation, visit friends and family, etc. Just think of all the companies that require the highways to deliver their goods, farmers to deliver ...

Solution Summary

This solution uses the highway system and the entire transportation system as an example of a subsidizes public good paid for by taxes. He compares the pros and cons of such a subsidized good for the public.

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