- A locative effects: These have to do with how resources are distributed by sector. Subsidies encourage the allocation of greater resources to the subsidized industry.
- Redistributive effects: These generally rely on the elasticities of the relevant groups’ desires for the subsidized commodity, the elasticities of the supply of the same good and the method of subsidy administration.
- Fiscal effects: Since a large fraction of subsidies come from the budget, they obviously have an impact on the economy. Fiscal deficits are so immediately increased. Indirectly, subsidies may have a negative impact on the budget by diverting funds from tax-producing industries to those that could have a poor potential for tax generation.
- Trade effects: A fixed price that is markedly less expensive than the market clearing price might decrease domestic production while increasing imports. However, subsidies to domestic manufacturers may allow them to provide prices that are competitive internationally, either lowering imports or increasing exports.
Subsidy: Meaning, Types, Categories and Benefits of the Subsidy