Abstract
This paper will analyze the justification and effectiveness of government subsidies. This paper will discuss an industry that is subsidized by the U.S. government and address the following: why the U.S. government subsidizes the industry, how the subsidy alters the market outcome, who gains and who loses from the government intervention, any beggar-thy-neighbor issues, and why the subsidy is or is not justified.
Introduction
Many industries rely on government assistance in both good times and bad. “The potential micro and macro failures of the marketplace provide specific justifications for government intervention” (Schiller, 2010). Government interventions “encompass a wide range of regulatory, fiscal, tax, and legal actions that modify the rights and responsibilities of various parties in society. Interventions can increase or decrease costs to particular groups, effectively acting either as a subsidy or as a tax” (Subsidies and Market Interventions, 2013). Since the 1930’s the government’s role has assumed more responsibilities including “maintaining macroeconomic stability, protecting the environment, and safeguarding the public’s health” (Schiller, 2010).
Government Intervention A government subsidy is defined as “monetary assistance granted by a government to a person or group in support of an enterprise regarded as being in the public interest” (Subsidy, 2013). An example of an industry that is subsidized by the U.S. government is the energy market, specifically related to the costs of fuel. Government subsidies are common in most countries and benefit many industries. The U.S. subsidizes the fuel industry in order to make the price of oil more affordable to its citizens. Governments sometimes provide subsidies which can allow the price of oil to remain fixed below free floating market rates (Government Subsidies on Fuel Costs, 2013).
The fuel subsidy “alters the market outcome because if oil prices increase, countries that heavily subsidize oil prices may suffer, because the cost of the subsidies will start consuming ever-larger amounts their budgets” (Government Subsidies on Fuel Costs, 2013). Similarly, “this effect will be magnified by the fact that the demand for oil in these countries will tend to remain stable, or even grow, because the lack of change in fuel costs fails to provide any incentive for citizens to reduce their consumption”(Government Subsidies on Fuel Costs, 2013). Furthermore, “marginal subsidies on production will shift the supply curve to the right until the vertical distance between the two supply curves is equal to the per unit subsidy; when other things remain equal, this will decrease price paid by the consumers (which is equal to the new market price) and increase the price received by the producers. Similarly, a marginal subsidy on consumption will shift the demand curve to the right; when other things remain equal, this will decrease the price paid by consumers and increase the price received by producers by the same amount as if the subsidy had been granted to producers” (Effect of Taxes and Subsidies on Price, 2013). “Some government intervention in the marketplace is clearly desirable. Government intervention in the for whom question is desirable only if the distribution of income gets better, not worse, as a result of taxes or transfers. Even when outcomes improve, government failure may occur if the costs of government intervention exceeded the benefits of an improved output mix, cleaner production methods, or a fairer distribution income” (Schiller, 2010). “Subsidies that have little or no effect on commodity prices will not likely change consumption patterns for the affected fuel. However, removing even these subsidies will affect the market behavior of that fuel’s producers” (Subsidies and Market Interventions, 2013). Their removal will also save taxpayers billions of dollars. Therefore taxpayers lose from fuel subsidies. A beggar-thy-neighbor policy is an “economic policy through which one country attempts to remedy its economic problems by means that tend to worsen the economic problems of other countries” (Beggar-Thy-Neighbor, 2013). The literature did not state any beggar-thy-neighbor issues with fuel subsidization. Fuel subsidies are essential and justified for the U.S. economy until there is an economical and environmentally sound alternative. Until those alternatives come into existence, the fuel subsidies must remain for the economic well-being of America’s economy. Eliminating fuel subsidies is a long term goal which will overall have a positive impact on clean energy, air quality, and human health as the billions of taxpayer dollars that are provided to oil companies could be used towards clean energy innovations once fuel subsidies are removed.
Conclusion
“Government intervention may move us closer to our economic goals. If so, the resulting mix of market signals and government directives would be an improvement over a purely market-driven economy” (Schiller, 2010). Ultimately, “all government activity must be evaluated in terms of opportunity cost, that is, the private goods and services forgone to make resources available to the public sector” (Schiller, 2010).

References:
Beggar-Thy-Neighbor. Retrieved on March 8, 2013 from http://www.answers.com/topic/beggar-thy-neighbour
Effects of Taxes and Subsidies on Price. Retrieved on March 9, 2013 from http://en.wikipedia.org/wiki/Effect_of_taxes_and_subsidies_on_price
Government Subsidies on Fuel Costs. Retrieved on March 9, 2013 from http://www.investopedia.com/ask/answers/08/subsidize-fuel-gas-oil.asp#axzz2NAYJ49vU
Schiller, B. (2010). The Macro Economy Today. New York, NY: McGraw-Hill/Irwin.
Subsidies and Market Interventions. Retrieved on March 9, 2013 from http://www.eoearth.org/article/Subsidies_and_market_interventions
Subsidy. Retrieved on March 9, 2013 from http://www.thefreedictionary.com/Government+subsidies