Question

Q8) Provide a few examples of subsidies. Why do subsidies distort trade?

Answer 1

Subsidy is money or grants given by any government authority to support a business or industry, or financial support offered to fund a project. Some examples of subsidies are following:

· Money granted by one government authority to another, as for military aid.

· Money granted to a private enterprise to give the benefit to the public.

· Government gives money to a farmer to plant a specific farm crop.

· Agriculture related equipment sold to farmer at less than cost price or sometimes free of cost.

· Loan issued at zero Interest or on nominal interest rate by Govt. to startups

Trade-distorting used to describe a tax or subsidy or action that changes the characteristics of any trade. Market distortion is a situation in which prices are determined by anything except the supply and demand forces.

Through regulation, subsidies, taxes, and tariffs, Governments are the main source of most market distortions, Government uses regulations to protect the general well-being of all market stakeholders are considered by market purists to be distortions, but are broadly popular. It will protect people from sometimes unforgiving nature of markets

In case of subsidies many governments subsidize the agricultural sector, which sometimes makes farming more economically. Through subsidies farmers can gain artificially high prices for their products, Govt. giving them incentive to produce more than they might otherwise.

Although this type of intervention is not economically efficient, it does help ensure that a nation will have enough food to eat. So subsidies are the main reason behind distorting trades.