Real world subsidy programs
The United States has a vast array of subsidy programs. Spending on these programs and the taxes that finance them are major items in the government budget. Some subsidy programs, such as Medicare and food stamps, provide payments to buyers. Others, such as the subsidies to the arts, public broadcasting, and sports stadiums, are directed toward suppliers. As we discussed, however, the party granted the subsidy may not be the one who captures the larger share of the actual benefit from the subsidy.
Still other subsidy programs are combined with price controls. Many agriculture subsidies fall into this category. The government fixes the prices of products like wheat, corn, cotton, and tobacco above the market equilibrium. To maintain the above-equilibrium price, the government purchases any amount produced that cannot be sold at the artificially high price. The government also restricts the acreage farmers are permitted to plant for these crops. If it were not for the planting restrictions, huge surpluses of these products would develop.
Sometimes government subsidies are granted only to a select group, or subset, of buyers (or sellers). Consider the structure of health-care subsidies in the United States. The Medicare program subsidizes the health-care purchases of senior citizens, and the Medicaid program provides subsidies to low-income households. These subsidies increase the demand for health care and drive up the prices of medical service for all consumers, including those ineligible for either program. In cases where only some of the buyers in a market are subsidized, groups that are ineligible for the subsidies will generally be harmed because they will have to pay higher prices for the good or service than they would otherwise have to, even though they do not receive a subsidy.
Subsidy programs are often highly complex, and it is sometimes difficult to determine whom they really benefit. As we proceed, we will analyze several of these programs in more detail. The supply and demand model presented here will facilitate our analysis..