Governments pay farmers to grow corn. They cover part of the cost of solar panels. They reimburse hospitals for treating uninsured patients. These payments are subsidies, transfers from the government to producers or consumers to lower costs or encourage activity. They are one of the most common tools of economic policy, and one of the most controversial.

Subsidies are justified when markets underprovide something valuable. Renewable energy is a classic case. Solar and wind power reduce pollution, but their benefits are spread across society. Without a subsidy, private firms would invest less than is socially optimal. Subsidies can also stabilize prices for farmers, keeping food affordable during bad harvests. And they can protect infant industries until they can compete globally.

But subsidies have a dark side. They distort markets, encouraging overproduction and waste. They are hard to remove once in place, because beneficiaries organize politically. They can become a form of corporate welfare, enriching well-connected firms. The World Trade Organization tries to limit agricultural subsidies, with limited success. Every government claims to hate them, and every government pays them.

Subsidy examples

• Agricultural price supports
• Renewable energy tax credits
• Housing subsidies and rent assistance
• Student loan subsidies
• Export subsidies