4. Criteria For Government Subsidies

In general, but with some important exceptions, the free market should provide society with all of its goods and services without government subsidies. Utilities, food crops, fuel, school lunches, and most other goods and services should not be subsidized. Goods and services should be subjected to the properly regulated forces of the free market to allow for efficient market feedback concerning supply and demand. Subsidies cause the end users to pay less than the ‘true’ cost of the good or service, thus inevitably leading to wasteful usages of the good or service being subsidized. However, there are some good reasons why some things need to be subsidized, the main one being that certain necessary goods or services are not practicably capable of being financially self-supporting.

Subsidy Exceptions

The main exceptions include services directly related to civil governance, such as politicians’ salaries, election expenses, court costs, police protection, providing for the national defense, etc., because these are essential public goods for which government funding is logical.

Subsidies are also justifiable for funding an educational system designed for the masses to create a fully literate (including culturally literate) and skilled (at a basic level) population, as well as a population that is able to think critically and logically through any circumstances, including during all kinds of emergencies.

Another category for exception may be research and development which includes helping birth new technologies as well as research dedicated to expanding human knowledge. Funding these activities should be a major focus of subsidies because private industry is sometimes incapable or unwilling to invest in such research until the fruits of that research have matured enough to be able to survive by themselves in the free market or because it is unlikely that such activities will ever yield profits. Consequently, such funding is very important for producing the breakthrough technologies that often improve the living conditions of populations or advance the knowledge base for continued human research.

Apart from the exceptions mentioned above, government subsidies should be temporary, have very valid reasons, and recipients should be encouraged to wean themselves off of these subsidies so as to survive in the free market. Utilities like water, electricity, natural gas, etc., should not be subsidized merely because many people consider them essential products and services for society. Their degree of importance does not, in itself, justify government subsidies. However, the government should insure that such basic goods and services, like utilities, are provided to the population without interruption, under fair market prices and with a certain degree of reliability.

Subsidy Rule #1

First, there should never be absolute time limits on how long something could be subsidized, but periodic assessments should be made concerning the viability or worthiness of the cause being subsidized and whether the subsidy should continue or whether it would be wiser to gradually or suddenly cut off the subsidy.

Subsidy Rule #2

Second, government subsidies for causes which are deemed not worthy of continued subsidies, but with potential, should generally have their subsidies phased out over a period of years. Phasing out subsidies, as opposed to suddenly eliminating funding, would give the subsidized products a chance to find other sources of funding, encourage a speeding up of its development, and generally improve its chances of eventual success in the free market. Of course, if conditions warrant the subsidy could be frozen at certain levels or maybe even increased, but these should be the exceptions. Depending on several factors, the rate at which a subsidy is decreased probably shouldn’t exceed 20% of the total subsidy per year but average closer to a 10% annual reduction of the subsidy amount. For example, the year in which a decision was made to eliminate a subsidy for a project would automatically be defined as the base year (100%) for which subsequent subsidy reductions would be based. If the agreement calls for a 10% reduction in subsidy amounts each year, this means that during the next year the subsidy would be reduced by 10%, to 90% of its original, base year amount, and the year after that, it would be reduced by another 10%, down to 80% of its base year funding. Five years later, it would have dropped to 50%, and 10 years later, the subsidy would be at zero. If multiple entities are engaged in the production of a subsidized good or service, this gentle decrease in the subsidy amount would prevent disruptive shocks from being transmitted through segments of that market and would give those participants time to plan for further funding or consolidation. The rate at which a subsidy is reduced could be different depending both on specific developments within a market and individual project qualities.

Subsidy Rule #3

Third, subsidies for the production of a good or service should generally decrease as more and more suppliers enter the domestic or foreign market, depending on the purpose of the subsidy. More companies entering a market can generally be taken as an indication that the subsidized good or service has found favor in the market and that competition is beginning to develop. Greater competition generally means that the subsidized good or service has greater production and/or pricing flexibility, essentially, characteristics that would enable it to better survive in a free market environment.


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