Should Government Subsidize Or Not Subsidize Fuel?

Sierra Leone president Julius Maada Bio attends a press conference after a meeting with Ivorian President on May 4, 2018 at the presidentaial palace in Abidjan. / AFP PHOTO / Sia KAMBOU

By Amin Kef Sesay

There are many reasons why Governments around the world grant subsidies. In developing countries, many Governments adopt price controls for basic consumer goods. They try to counter the shortfall in the availability of such goods with direct subsidies to producers of these commodities.

In Egypt, Iran, Mexico, and other developing countries the prices of staple items such as bread, sugar, and cooking oil have been under Government control.

As a specific example, Venezuela kept the price of gasoline very low and well below the world price. However, one consequence of artificially cheap gasoline in Venezuela was the smuggling of gasoline from that country to Colombia, a neighboring State where gasoline is not subsidized.

One disadvantage of a subsidy policy is that while it is designed to help the poor, everyone including the rich, who do not need the subsidy, benefits from it.

Basically, subsidies are provided by the Government to specific industries with the aim of keeping the prices of products and services low for people to be able to afford them and to encourage production and consumption.

A subsidy is a direct or indirect payment to individuals or firms, usually in the form of a cash payment from the Government or a targeted tax cut. In economic theory, subsidies can be used to offset market failures and externalities in order to achieve greater economic efficiency.

Government subsidies are financial grants extended by the Government to private institutions or other public entities, in order to stimulate economic activity or promote activities that are in the public good.

For instance, the Free Quality Education program is a subsidy provided by the Government and it aids the social development and uplift of the poor and the socially depressed classes by making such education easily accessible to them.

Subsidies, which are financed from either tax or non-tax revenue, or result in a deficit, have some disadvantages that include:

  • Product Shortages. When the Government subsidizes a particular product, it causes the price to go down and consumption to go up
  • Difficult to Measure Success
  • Inefficient Transfer to Recipients
  • Higher Taxes

A cut in subsidies puts the Government in a dilemma because if the Government reduces subsidies it will affect the poor class, traders, and the common person. If it does not do so, the rich class also benefits and puts enormous strain on the limited Government resources.

In short, any subsidy that benefits women, the poor and the marginalized is good; their growth propels national growth. … Similarly, subsidies or loans given for secondary agriculture initiatives reduce the burden on primary agriculture activities. This and previous Governments have given lavish subsidies in the form of machinery, seeds, animal stocks, pesticides, milling machines, stores, cash, etc., to small and medium scale farms in the aim of increasing food productivity and reducing food insecurity and help whittle down disguised unemployment in the agric-sector.


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