Why are subsidies sometimes controversial?

Why are subsidies sometimes controversial?

• A. They only benefit consumers
• B. They may prohibit new businesses from entering the market
• C. They are universally seen as beneficial
• D. They have no financial impact

Answer: (B)

Subsidies are sometimes controversial because they can create barriers for new businesses attempting to enter a market. When established companies receive subsidies, they often gain a financial advantage over potential competitors. This can lead to reduced competition, as new entrants may find it difficult to compete with subsidized firms that can lower their prices or invest more in marketing and innovation due to the financial support they receive.

The implications of subsidies can skew the market dynamics. While they may aim to support certain industries or promote specific economic activities, they can inadvertently lead to market inefficiencies and hinder entrepreneurship. Hence, the controversy stems from the balance between supporting existing businesses and fostering an environment that encourages new ones to flourish.