Transfers of money to producers are typically divided into two broad categories: those provided at a cost to government, such as grants and tax concessions, and those provided through the market as a result of policies that raise prices artificially. The latter, called market price support (MPS), may derive from a domestic price interventions (for example, a minimum-price policy), and is usually supported by foreign trade barriers such as a tariff or quantitative restriction on imports. The OECD defines MPS formally (for agriculture) as "an indicator of the annual monetary value of gross transfers from consumers and taxpayers to agricultural producers arising from policy measures creating a gap between domestic producer prices and reference prices of a specific agricultural commodity measured at the farm-gate level."
MPS is an element that is included in many studies of support to particular goods or sectors, and is added together with other subsidies to yield an estimate of total support.
The concept of market price support is simple enough. By maintaining an import tariff on a good, for example, a government raises the price of that good above what it could sell at in the absence of the tariff. From the producers' standpoint, the revenues they will receive would be similar to those they would receive were the government instead to pay them an equivalent premium per unit produced. The main difference is that MPS raises domestic prices, and may therefore dampen demand compared with a budget-financed price premium, especially if there are close substitutes that, as a result of raising the price of the targeted good, become relatively cheaper. In such situations, such as for coal for power generation, governments have sometimes solved the problem of changed relative prices by constraining the ability of consumers to shift to the competing product.
From the government's perspective, the advantage of providing support indirectly, through a market intervention, is that it is less transparent, and the transfers do not appear in its budget. Rather than taxpayers, consumers bear the burden. For this reason, MPS is considered by economists to be one of the most market-distorting forms of support provided through government policies. Unfortunately, it is also still one of the largest elements of total support, especially in agriculture.
