There is a tendency over time for the benefits from subsidy programmes to become capitalised into the least elastic factor of production. The economist Gordon Tullock labelled this phenomenon "the transitional gains trap". As Professor Tullock explains, the gains from subsidies tend to be transitional, accruing mainly to those who can immediately take advantage of a new scheme. Their successors end up paying higher prices for land, fishing licences, mineral rights, ect. As such, removing the subsidy thus risks imposing a transitional loss on the subsequent owners of these assets.
The beneficiaries of a subsidy can become entrapped in a social sense as well. This is especially the case when subsidies are used to support employment in rural industries, such as agriculture, fisheries and mining, which require specialised skills but not necessarily much formal education. The resulting low mobility of the affected labour force itself becomes a barrier to policy reform, increasing subsidy dependency, and making structural adjustment all the more traumatic when it finally does come.
Subsidies that are linked to particular technologies can have profound, long-term effects on dynamic efficiency. Many energy-related subsidies (and regulations) have been of this sort. The more prescriptive they are, and the less targeted at the achievement of policy outcomes, the greater the opportunities for distortions and unintended consequences. The challenge for policymakers is to achieve a balance between the benefits of stimulating R&D and innovation, while not forcing technological responses to economic and environmental forces down irreversible paths. Once governments had invested billions of dollars supporting the development of civilian nuclear power, for example, there was a strong impetus to continue with the original designs. A similar phenomenon can be seen in the development of corn-based ethanol in North America, where even if costs fall for making ethanol from cellulosic feedstock fall, the dominant feedstock will likely remain corn (maize) for many years to come.
