Subsidies are provided by governments to encourage certain economic activity or to further support national goals. Subsidies typically take the form of cash payments, grants or tax breaks. They can also be a guaranteed or low-interest loan. Subsidies can help communities that are disadvantaged obtain healthcare, education or housing. They also provide benefits to businesses, like lower taxes and purchases by the government of their products.

Many critics of subsidy programs draw attention to the distortions in incentives they generate. They claim that subsidies foster an unidirectional relationship between political parties and businesses, encouraging them to donate to campaigns and demand preferential treatment from the policymakers. They also note that subsidies can deter innovation and inefficiency by making businesses that rely on them less likely to invest in new technology or adjust their business model to meet consumer requirements.

Whatever the reason the impact of these subsidies is difficult to determine and include significant costs that aren’t reflected in government projections. They could also derail more equitable and efficient public spending.

For instance when governments offer subsidies to energy production, they are able to help solar panels be affordable for homeowners and help companies that sell them by lowering their selling prices or providing tax credits. They can also help promote the consumption of a product or service, for instance by giving families subsidies that help pay for a portion of their health insurance premiums. Similarly, a government can encourage people to get federal student loans by offering that they will be able to repay them at low rates, and also offering benefits like deferment and flexible payment schedules.