Government Subsidizing Private Sector

It's common for communities, states, and the country to subsidize private sector businesses. This page discusses whether this is appropriate or not.

For Subsidies:

  1. Some people have formed a small town and would like to use sales tax revenue to encourage the creation of a local gas station since it's currently several miles to the next one. The subsidy allows the business to turn a profit in a more reasonable length of time and attracts the gas station when the market won't support it otherwise.
  2. Another common scenario is when there's a blighted area of town. Such blighted areas can be eyesores and make living in this town less pleasant. It seems reasonable to allow a subsidy to encourage cleanup of the blighted area, which brings in tax revenue and improves the beauty and economic viability of the town.

Against Subsidies:

  1. It's possible for a subsidy to create an unfair advantage for one business relative to their competition. This seems unjust.
  2. Allowing government to subsidize the private sector encourages corruption. A business leader with questionable integrity may provide a large campaign contribution to a government leader and then ask for a favor in the form of a subsidy or exceptions to regulations. Avoiding or banning subsidies helps reduce the temptation for corruption.

Conclusions:

  1. The gas station scenarios make good sense. It seems wrong to say a town cannot subsidize to attract a business. However, if the business has a competitor, it would create unjust competition. This seems like one rule of thumb to determine whether a subsidy is acceptable or not. Perhaps giving the same subsidy to all competitors or all businesses would help level the playing field.
  2. To outlaw all subsidies is to limit the freedom of residents and business owners to protect their investment.
  3. Subsidies create temptation and must be carefully managed if they exist at all. Generally it seems better to avoid them.