Chapter 5: Problem 3

What are the major forms of subsidies that governments grant to domestic producers?

Short Answer

Expert verified

The major forms of subsidies that governments grant to domestic producers include direct cash subsidies, indirect subsidies, infrastructural subsidies, export subsidies, and tax subsidies.

Step by step solution

Definition of subsidy

Initially, it's crucial to understand the concept of a subsidy. A subsidy is a financial assistance or support extended to an economic sector (or institution, business, or individual) generally with the aim of promoting economic and social policy.

Direct Cash Subsidies

The first form of subsidies is direct cash subsidies. Governments grant these to domestic producers to decrease their production costs. They can take the form of grants, low-interest loans, tax breaks and other types of monetary support.

Indirect Subsidies

Indirect subsidies are the second form of subsidies. Governments provide these in ways other than cash. Examples of indirect subsidies include research and development funding, marketing assistance, and providing access to resources at below-market rates.

Infrastructural Subsidies

Infrastructural subsidies are the third type. They are delivered by the government where it supports domestic producers by developing infrastructural facilities such as roads, ports, and power facilities.

Export Subsidies

Export subsidies are the fourth type. These are financial supports allowing domestic producers to sell their goods or services to foreign countries at a lower price level.

Tax Subsidies

Lastly, tax subsidies are forms of fiscal incentives the government provides by reducing the amount of tax domestic producers have to pay. This action lowers the financial burden they experience.

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