Many subsidies are defended as benefiting disadvantaged groups, or groups the politicians like to make us believe are disadvantaged. Some do that, but even those that do benefit disadvantaged groups often benefit richer people or companies even more.
Perversely, the distributive consequences of subsidies are often precisely the opposite of what the framers of the policies intended. Most countries that subsidise farmers or fishers profess to be looking out for the small owner-operator. Yet, by design, subsidies that are tied to outputs or inputs tend to favour larger producing units. Recently, for example, the Environmental Working Group, an American non-profit organization, counted up all the direct payments made by the U.S. Government to farmers between 1994 and 2005 and found that ten percent of subsidy recipients collected 73 percent of all subsidies, amounting to $120.5 billion Analyses of agricultural support programmes in other countries appear to lend credence to the 80:20 rule - the impression that 80% of support goes to 20% of the beneficiaries.
The conduit between a government and the intended recipient of a subsidy is often more like an open sluice than a pipeline, with plenty of opportunities for others to dip into the stream before it reaches its final destination. Any subsidies that are linked to the production of a good or services require the recipient to spend money on inputs used in producing that good or service. For example, if a farmer is paid by the government to grow corn, she will first have to spend some of that money on seeds, fertilizers, pesticides and fuel for the tractor. What is left as an increase in income may be only 20% or 25% of the cost to the government. Economists call the ratio between what ends up in the pockets of the target group and what the government spends the transfer efficiency of the subsidy. Subsidies for the purchase of inputs, by lowering the producer's costs, can have a fairly high transfer efficiency, but only if the supply is not limited. If the seller of the subsidized good is a monopoly, or there is a finite supply of the input, the subsidy will mainly enrich the input provider.
