Subsidy Policy

Government sometimes responds to positive externalities by providing subsidies. Subsidy policy can be indirect, like government construction and highway maintenance grants that benefit the trucking industry. They can be direct payments, such as agricultural payment-in-kind (PIK) programs, special tax treatments, and government-provided low-cost financing.

Tax credits on business investment and depletion allowances on natural resource extraction are examples of tax subsidies given in recognition of social benefits such as job creation and energy independence. Positive externalities associated with industrial parks induce government to provide local tax incremental financing or industrial revenue bond financing for such facilities. This low-cost financing is thought to provide compensation for the external benefits of economic development.

Tradable emissions permits are pollution licenses granted by the government to firms and individuals. Rather than spend millions of dollars on new equipment, raw materials, or production methods to meet pollution abatement regulations, firms sometimes purchase tradable emissions permits from other companies. These tradable emmissions permits are a valuable commodity that can be worth millions of dollars. Opponents of this system argue that they infringe on the public's right to a clean and safe environment. Proponents contend that the

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