Question

What is a subsidy, and what is it used for? Explain especially in the business world.

a. Does capitalism as a system support government subsidies to firms? Why not? What are the moral and practical reasons against giving subsidies?

      b. Does socialism as a system support government subsidies to firms? Why? What are the moral and practical reasons to favor subsidies?

Answer 1

A subsidy is a benefit given to an individual, business or institution, usually by the government. It is usually in the form of a cash payment or a tax reduction. The subsidy is typically given to remove some type of burden, and it is often considered to be in the overall interest of the public, given to promote a social good or an economic policy.

A subsidy takes the form of a payment, provided directly or indirectly, which provides a concession to the receiving individual or business entity. Subsidies are generally seen as a privileged type of financial aid, as they lessen an associated burden that was previously levied against the receiver or promote a particular action by providing financial support.

(A) Capitalism doesn't support subsidies because subsidies actually distort capitalism. They are desired by some when a positive externality is present, and the government decides to "subsidize" whatever it is so there is more of whatever it is. Further, Capitalism thrives on cut-throat competition and wants minimal state intervention (capitalists want everything to be left to the market forces). They want that they should be left free to use all the resources and fill their coffers with trucks of money.

(b) Yes, socialism as a system supports govt subsidies to firms because they believe that weaker firms need govt support to thrive in the competition. They believe in taking from the rich, and giving it to the poor, which lets the smaller businesses live.