Subsidy

In: Business and Management

Submitted By essaystudy
Words 1741
Pages 7
Background.
What this paper endeavours to illustrate is that government funding is sometimes necessary for the sustainable functioning of the economy and society from a holistic perspective. Firstly, let us define the term “subsidy”, and how this fits in an economic context. Oxford Dictionary defines “subsidy” as follows: “a sum of money granted by the state or a public body to help an industry or business keep the price of a commodity or service low” (OED Add. Ser. Vol. 3, 1997). Subsidising industry is anathema to the concept of free trade as the very foundation of free trade, as we know, is built on the cornerstone of “laissez-faire” capitalism and a limited role for government inasmuch as the market is out of the sphere of influence of the government. Another notion is invoked when discourse on the subject of government intervention regarding an under-performing market manifests; economists appeal to the term “market failure” to dub this phenomenon. A “market failure” can be defined as an occurrence in the market whereby resources are not efficiently allocated (Financial Times Lexicon, 2014). We’ll explore this notion further in the latter part of this essay.
Underlying philosophies.
The proponents of free trade and free markets, such as Adam Smith, do indeed possess and proliferate legitimate arguments concerning government intervention in the market. To be intellectually honest from a position of advocating government intervention, this admission will be made: it should not be the role of government to intervene in the market as a standard practice, and the market ought to be free to flourish and create wealth. Nobel Prize-winner Ronald Coase (1960) attempted to demonstrate that as long as property rights are clearly defined and transaction costs are low, negotiation between affected parties may be sufficient in resolving apparent negative…...

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