In economics, a government payment that encourages producers or consumers to buy or sell more is called a subsidy.
A subsidy lowers the effective cost of an activity for its recipient. A producer subsidy can reduce per-unit production costs and shift a supply curve to the right, potentially increasing output and lowering the price paid by consumers. A consumer subsidy increases purchasing power for a particular good and can shift demand to the right.
Governments use subsidies for many reasons, including supporting agriculture, expanding renewable energy, promoting research, or making selected services more affordable. Their effects depend on market conditions and on whether the payment is tied to each unit, total output, or another condition.
Subsidies are not costless. They require public funds and can create overproduction, distort resource allocation, or benefit recipients other than the intended group. Economists therefore examine both the market benefit and the government’s fiscal cost when evaluating them.