The Effectiveness of Government Subsidies for Goods Essay

The Effectiveness of Government Subsidies for Goods - Essay Example Subsidies involve payment of a certain portion of the cost of production to the firm with an objective of lowering the price of the good and thereby encouraging more consumption of the same (Lines, 2005). Subsidizing farm produce has the effect of ensuring there is enough food stuff and agriculture related products in the economy. However, critics of this economic policy argue that it breeds inefficiency and misallocation of scarce resources. Objective This research will be guided by the following objective: To establish the effectiveness of government subsidies on commodities in the product market. Literature Review Conradie (2009) notes that the poor condition of most of the marine capture fisheries in the world has raised increasing public concern of late. There is an imminent economic impact of diminished resources of fish on the regions’ economies in both developed and developing world economies, as well as near commercial extinction of stocks of fish that have placed gre at impact on ecosystems. The declaration which emanated in the World Trade Organization (WTO) meeting that was held in Doha emphasized on fisheries as a sector which needs maximum considerations in the next meeting of international negotiations on world trade. While there is a concern on overfishing, the main operational concern remains the role played by subsidies in stimulation of overfishing. If it comes out that the existence of subsidies stimulate overfishing, and then there is need to come up with a control mechanism or completely eliminate the policy. Subsidies often play two key extra roles; they do stimulate fishing and may possibly raise the national income of the country (Grosh, 2008). If the fishing level is below that level that can be safely sustained in the economy, then subsidies that enhance fishing could be useful. Lines (2005) cite that subsidies could interfere with the World Trade Organization control regulations if they lie within the realms of the Internationa l Agreements on Subsidies and Countervailing Measures by the WTO. The concept of subsidies is delicate in the sense that the government introduces them for valid purposes, like economic development strategies. However, with the passage of time, subsidies that were intended for useful purposes may become entrenched and start serving primarily the desires of industry participants who receive the subsidies. Elimination of these subsidies therefore becomes a political thing in the locality, with external implications. Haddad and Shepherd (2011) argue that the policy of subsidies is a complex one due to the fact that there exist no agreement as to what a subsidy actually is. There also exists no scientific way of measuring a subsidy and evaluating its impact to the intended economic sector. At the policy level, we do not have an agreement on when subsidies can be considered harmful or useful. Part of the reason behind the existence of an agreement is the fact that it is complicated to ev aluate the impacts of subsidies in the environment, economy, internal and international trade. Part of the reason for non- agreement on what the definition of a subsidy entails is because subsidies are nowadays being eliminated by governments, it could not be politically wise for a country admitting that a policy actually implies a subsidy. Clements (1998) explains a situation where South African government, through the Department of Agriculture,