SUDSIDY

SUBSIDY

Answer 1 A direct or indirect payment by a government to its country's frims to make selling or investing abroad cheaper for them
 Answer 2

• Subsidy is the economic benefit (such as a tax allowance or duty rebate) or financial aid (such as a cash grant or soft loan) provided by a government to:
• support a desirable activity (such as exports),
• keep prices of staples low,
• maintain the income of the producers of critical or strategic products,
• maintain employment levels, or
• induce investment to reduce unemployment.
• The basic characteristic of all subsidies is to reduce the market price of an item below its cost of production. Also called subvention.
• Indirect financial contribution by a firm to its employees, such as low cost meals or benefit.
• For more information, refer to link below.

Government Subsidy Policy and its Impact on Efficiency and Economic Growth

Many governments in developing countries adopt price controls for basic consumer goods. They may counter the shortfall in the availability of such goods with direct subsidies to producers of these commodities. In Egypt, Iran, Mexico, and other developing countries the prices of staple items such as bread, sugar, and cooking oil have been under government control. As a specific example, in Venezuela the price of gasoline has been kept very low and well below the world price. At the official exchange rate, a gallon of premium gasoline in Venezuela is 5.8 U.S. cents! It is even lower at the unofficial exchange rate: only 1.5 U.S. cents per gallon!

One consequence of artificially cheap gasoline in Venezuela is the smuggling of gasoline from that country to Colombia, a neighboring state where gasoline is not subsidized. Every day thousands of cars, motorcycles, and buses in Venezuela load on gasoline and head into Colombia. There they sell their gasoline in small containers --or siphon it out of their cars-- for a profit.

The subsidy policy is part of a populist strategy of the former president of Venezuela, Hugo Chavez. By instituting government subsidies on basic goods like gasoline, Mr. Chavez made himself enormously popular. However the long term effects of this policy are questionable. For one thing, Venezuela, a major oil exporter is chronically short of cash. The network of refineries in Venezuela is in a state of disrepair. A major crude oil exporter, Venezuela depends on the imports of gasoline for its domestic consumption.

One aspect of the gasoline subsidy policy is that while it is designed to help the poor, everyone including the rich, who do not need the subsidy, benefit from it. The International Energy Agency calculates that energy subsidies cost the Venezuelan government some $27 billion in 2011, revenues it could have earned by selling gasoline at market prices. The lost energy revenues represent a significant 8.6% of the gross domestic product of Venezuela.

Since the government spends a sizeable amount of its budget on gasoline subsidy, it is unable to spend on important investment projects such as building new infrastructures or repairing the existing ones. The government also has to limit its expenditures on essential services such as crime control.

This distortionary measure is unlikely to change. Many Venezuelans have grown accustomed to the long running policy of artificially cheap gasoline and consider it their fair share of their economy’s oil wealth.

This essay is based on the article, Cheap Gas in Venezuela Comes at a Heavy Cost, from The Wall Street Journal.

ESSAY – Why do governments adopt subsidy and price control policies? State the main points this article makes and articulate a pro or con argument (related to this article)