Editing Subsidy (section)

==Economic effects==
[[File:Subsidy- visualization.jpg|thumb|upright=1.7]]

Competitive equilibrium is a state of balance between buyers and suppliers, in which the quantity demanded of a good is the quantity supplied at a specified price. When the price falls the quantity demand exceeds the equilibrium quantity, conversely, a reduction in the supply of a good beyond equilibrium quantity implies an increase in the price. The effect of a subsidy is to shift the supply or demand curve to the right (i.e. increases the supply or demand) by the amount of the subsidy. If a consumer is receiving the subsidy, a lower price of a good resulting from the marginal subsidy on consumption increases demand, shifting the demand curve to the right. If a supplier is receiving the subsidy, an increase in the price (revenue) resulting from the marginal subsidy on production results increases supply, shifting the supply curve to the right.

[[File:Subsidy - visualization 2.tiff|thumb|upright=1.7]]

Assuming the market is in a perfectly competitive equilibrium, a subsidy increases the supply of the good beyond the equilibrium competitive quantity. The imbalance creates deadweight loss. Deadweight loss from a subsidy is the amount by which the cost of the subsidy exceeds the gains of the subsidy.<ref name="watkins">{{cite web
 | last = Watkins
 | first = Thayer
 | title = The Impact of an Excise Tax or Subsidy on Price
 | website = San José State University Department of Economics
 | url = http://www.sjsu.edu/faculty/watkins/taximpact.htm
 | access-date = 2016-06-28
 | archive-date = 2016-06-23
 | archive-url = https://web.archive.org/web/20160623042726/http://www.sjsu.edu/faculty/watkins/taximpact.htm
 | url-status = live
 }}</ref> The magnitude of the deadweight loss is dependent on the size of the subsidy. This is considered a [[market failure]], or inefficiency.<ref name="watkins"/>

Subsidies targeted at goods in one country, by lowering the price of those goods, make them more competitive against foreign goods, thereby reducing foreign competition.<ref name="Kolb 2008">{{cite book|last=Kolb|first=R.W.|title=Encyclopedia of business ethics and society|year=2008|publisher=Sage Publications|location=Thousand Oaks|isbn=9781412916523|chapter=Subsidies}}</ref> As a result, many developing countries cannot engage in foreign trade, and receive lower prices for their products in the global market. This is considered protectionism: a government policy to erect trade barriers in order to protect domestic industries.<ref>Protectionism. (2006). Collins Dictionary</ref> The problem with [[protectionism]] arises when industries are selected for nationalistic reasons (infant-industry), rather than to gain a comparative advantage. The market distortion, and reduction in social welfare, is the logic behind the World Bank policy for the removal of subsidies in developing countries.<ref name="Ameg">Amegashie, J. A. (2006). The Economics of Subsidies. Crossroads , 6 (2), 7-15.</ref>

Subsidies create spillover effects in other economic sectors and industries. A subsidized product sold in the world market lowers the price of the good in other countries. Since subsidies result in lower revenues for producers of foreign countries, they are a source of tension between the United States, Europe and poorer developing countries.<ref name="Parkin et al. 2007">{{cite book |last1=Parkin |first1=M. |last2=Powell |first2=M. |last3=Matthews |first3=K. |date=2007 |title=Economics |edition=7th |publisher=Addison-Wesley |location=Harlow |isbn=978-0132041225}}</ref> While subsidies may provide immediate benefits to an industry, in the long-run they may prove to have unethical, negative effects. Subsidies are intended to support public interest, however, they can violate ethical or legal principles if they lead to higher consumer prices or discriminate against some producers to benefit others.<ref name="Kolb 2008"/> For example, domestic subsidies granted by individual US states may be unconstitutional if they discriminate against out-of-state producers, violating the Privileges and Immunities Clause or the Dormant Commerce Clause of the United States Constitution.<ref name="Kolb 2008"/> Depending on their nature, subsidies are discouraged by international trade agreements such as the World Trade Organization (WTO). This trend, however, may change in the future, as needs of sustainable development and environmental protection could suggest different interpretations regarding energy and [[renewable energy subsidies]].<ref>{{cite journal|last1=Farah|first1=Paolo Davide|last2=Cima|first2=Elena|title=World Trade Organization, Renewable Energy Subsidies and the Case of Feed-In Tariffs: Time for Reform Toward Sustainable Development?|journal=Georgetown International Environmental Law Review|date=2015|volume= 27|issue= 1|ssrn=2704398}} and {{cite journal|title=WTO and Renewable Energy: Lessons from the Case Law|journal=49 JOURNAL OF WORLD TRADE 6, Kluwer Law International| date=15 December 2015 |ssrn=2704453| last1=Farah | first1=Paolo Davide | last2=Cima | first2=Elena }}</ref> In its July 2019 report, "[http://www.oecd.org/economy/going-for-growth/ Going for Growth 2019: The time for reform is now]", the [[OECD]] suggests that countries make better use of environmental taxation, phase out agricultural subsidies and environmentally harmful tax breaks.<ref>{{Cite web|url=http://www.oecd.org/economy/going-for-growth/|title=Going for Growth 2019: The time for reform is now - OECD|website=www.oecd.org|access-date=2019-10-01|archive-date=2019-10-08|archive-url=https://web.archive.org/web/20191008051347/http://www.oecd.org/economy/going-for-growth/|url-status=live}}</ref><ref>{{Cite web|url=http://www.oecd.org/newsroom/uncertain-global-economy-should-prompt-governments-to-embark-on-reforms-that-boost-sustainable-growth-raise-incomes-and-increase-opportunities-for-all.htm|title=Uncertain global economy should prompt governments to embark on reforms that boost sustainable growth, raise incomes and increase opportunities for all - OECD|website=www.oecd.org|access-date=2019-10-01|archive-date=2019-10-01|archive-url=https://web.archive.org/web/20191001184518/http://www.oecd.org/newsroom/uncertain-global-economy-should-prompt-governments-to-embark-on-reforms-that-boost-sustainable-growth-raise-incomes-and-increase-opportunities-for-all.htm|url-status=live}}</ref>