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Understanding Subsidies: Definition, Types, and Effects

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Definition: Subsidies are benefits which are usually provided by a government to people, institutions, or companies.

When individuals, institutions, or firms face some sort of a problem, then their government can make a payment to them (usually in the form of cash or a rebate) to make things easy for them. Such payments are called subsidies. For example, the state government of Delhi started providing a power subsidy to households in the capital a few years ago. Currently, under this subsidy, the state government provides free electricity to those households with a power consumption of less than 200 units a month. However, for households that consume 201-400 units of power a month, the government provides a 50% subsidy on their power bill, which means their electricity bill is reduced by 50%. When analysing a subsidy, we need to examine how important it is for a government to provide that subsidy. Whether a government is genuinely providing a subsidy to needy sections of society or it is providing a subsidy just to get votes.

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing. This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

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