Subsidies have a tendency to beget other subsidies. Some of these are described below:
Sympathetic support: When support is used to influence the direction of technological developments, it often does so in a manner designed to benefit domestic producers. Many examples of this can be found in the energy sector, such as when governments support the construction of coal-fired "demonstration" power plants that are dependent on coal from high-cost domestic mines rather than on imported coal, or for biofuel refineries that use domestic feedstocks.
Compensatory or countervailing support: When support leads to higher input prices for downstream consumers, especially those that derive a significant proportion of their sales from exports, compensation is often provided in order to keep them buying domestically produced raw materials. Subsidies to food processing industries and to biofuel producers are common examples.
Subsidy clusters: As the subsidy expert Doug Koplow has observed, when support -or failure to consider opportunity costs - leads to lower prices for natural resources, a chain reaction can take place, whereby new investment occurs to take advantage of the cheap input. Often downstream consumers receive additional incentives from governments to do so. Hence aluminium plants are attracted to major hydroelectric projects, which are then followed by airframe manufacturers, and so forth.
Taken together, these derivative subsidy forms lend support to the notion that bad subsidies tend to chase out good ones - what the agricultural economist C. Ford Runge has called "Gresham's law of subsidies". Political economy also suggests that the "good" subsidies will over time be politically outmanoeuvred by the established groups to redirect public spending to themselves.
