Justification and Effectiveness of Government Subsidies

In this paper you will analyze the justification and effectiveness of government subsidies. Find an example of an industry that is subsidized by the U.S. government and address the following:

1. Explain why the U.S. government subsidizes the industry. 2.5 points

2. Describe how the subsidy alters the market outcome (address issues like the production possibility curve, quantity supplied and demanded and price). 2.5 points

3. Explain who gains and who loses from the government intervention. Address any beggar-thy-neighbor issues. 2.5 points

4. Explain why you think the subsidy is or is not justified. 2.5 points

1. The U.S. Government subsidizes domestic oil companies in order to attempt to make them competitive without foreign producers who can achieve greater economies of scale, therefore lower costs per unit, due to having larger quantities of oil reserves. The U.S. provides relief in the form of tax breaks through depletion allowances and accelerated depreciation for capital expenditures relating to oil production. The production possibility curve is affected by increased domestic oil production. The subsidies provided to the oil companies decrease the production of domestic agriculture, domestic green energy, and other government subsidized industries which could possibly be receiving these subsidies if they were not provided to the oil industry. The quantity of oil is increased, the demand remains somewhat static, so the price does decrease due to the subsidies.

2. However, domestic oil production quantities pale in comparison to other top producers in OPEC so the decrease in price is trivial. Even though the price decrease is not substantial at the pump, the oil workers win from the government intervention as they are provided with an increased workload. The oil producing companies are obviously winners as they are already some of the most profitable companies

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