A Review of Different Types of Subsidies and How They Work in Theory

This paper gives a brief review on types of subsidies and how they work in theory. The paper identified three types of subsidies: subsidies that increase revenue, subsidies that lower the cost of production, and subsidies that are not linked to production or input. With the use of graphic examples to describe the partial effects of subsidies on supply and demand, the following findings were obtained: one, for producers to sell more, they will need to produce more, and in order to produce more, a higher input level is required, which depends on the marginal productivity of the inputs; two, the larger the elasticity for supply and demand of input (the more responsive supply and demand are to changes in the price of the input), the larger quantity of input used for a given level of support, and thereby increasing the associated environmental damage from the use of that particular input; three, for a given demand curve, a shallow supply curve (reflecting a large price elasticity of supply) will yield larger volume effects in response to a certain change in price compared to a steep supply curve and vise a verse. Finally, the study found input subsidy is an example of subsidies that lower the cost of production, and direct income support or unconditional lump sum support to an industry as an example of subsidies that are not linked to production or input.