A subsidized product comes from a company, or industry that has received a subsidy--a type of economic assistance. Governments use subsidies to decrease the prices of goods lower than the price determined by the free market. Subsidies can benefit industries and consumers, but they can also be controversial.
Subsidies are designed to maximize the consumption of a good that involves positive externalities--a benefit caused by a good's consumption that affects people who did not consume the good. For example, if a person plants trees, other people also enjoy cleaner air and an attractive view.
There are many types of subsidies. The government may directly give a corporation cash, which is called a direct transfer. The government may also provide tax deductions, referred to as a tax subsidy, or trade protection subsidies, which involve the use of taxes or quotas to limit imports.
Examples of subsidized industries include education, agriculture, healthcare and public transportation.
Subsidies lower the prices on certain goods, which usually leads to an increase in consumption. If subsidized goods have positive externalities, increased consumption benefits society.
Subsidies are often controversial. Although subsidies may help one industry, they can also harm another by distorting price levels. In addition, subsidies require tax dollars. They also distort the free market, which can lead to inefficiency.