Subsidy leads to inefficiency. Notwithstanding the reasoning, sometimes subsidy could be justified; sometimes, efficiency is not the only consideration of a society. The word subsidy is commonly heard when a society tries to address the problem of inequity; subsidy is a tool of wealth redistribution.<\/p>\n
I maintain a high dose of skepticism against any subsidy policy. Yet, I am prepared to lower my opposition if such subsidy is well-tailored. A well-tailored subsidy however does not include blanket subsidy; blanket subsidy is the worst form of subsidy one could ever think off. An example of blanket subsidy is the current Malaysian fuel subsidy.<\/p>\n
A blanket subsidy is a lazy policy \u2014 at best, clumsy \u2014 formulated to solve a perceived problem. It generalizes society, assuming that everybody in the society is in need of the subsidy; that people are fully homogeneous. On the contrary, people are heterogeneous to a very large extent. If people were completely homogeneous, I do not doubt that communism would have ruled supreme.<\/p>\n
That generalization is costly. The generalization, believing that the lower, the middle and the upper economic class are equally needing of or benefiting from a blanket subsidy is an expensive proposition. It is expensive because it gives benefit to those that value such subsidy the least; the rich values subsidy less than the poor. A blanket subsidy does not make that discretion. Therefore, a blanket subsidy regime pays too much to increase societal welfare whereas in fact, a better policy would have done the same job with lesser resources. One of those better subsidy regimes is a targeted subsidy.<\/p>\n
A targeted subsidy policy specifically identifies a segment of a society that is in need of aid and then aids only those that in need of aid.<\/p>\n
With a targeted subsidy, resources that would have been used under blanket subsidy could be used to make investment in education or other areas that could permanently and structurally increase societal welfare.<\/p>\n
Not only that blanket subsidy as a policy is expensive, somebody has to fund it in order to maintain such policy. Resources ultimately has to be sourced from the society; the taxpayers. The society has to be taxed in order sustain any subsidy. Therefore, to defend a blanket subsidy as a mean to increase societal welfare is almost oxymoronic. The society is being taxed to support a subsidy \u2014 you pay me to pay you, all else being equal.<\/p>\n