Economists may not agree among themselves on the precise definition of a subsidy, but they do generally agree on their static, first-order effects. Theory shows that these depend on a number of factors, among which are the responsiveness of producers and consumers to changes in prices (what economists call the own-price elasticities of supply and demand), the form of the subsidy, the conditions attached to it, and how the subsidy interacts with other policies.
In general terms, elasticities of supply and demand determine to what extent the actual, economic incidence diverges from the intended impact incidence of a subsidy: in a seller's market, consumer subsidies will be shifted onward to producers, and vice-versa. Other policies can also influence outcomes, as when production quotas are imposed on the subsidised activities.
Critics often point to the economic distortions created by subsidies, especially subsidies that are used to promote specific sectors or industries. Generally, such subsidies tend to divert resources from more productive to less productive uses, thus reducing economic efficiency.
Those who take a more benign view argue that subsidies can serve redistributive goals, or can help to correct market failures. But, as the public-finance economist Ronald Gerritse once warned, subsides defended on such grounds "may have externalities that we did not bargain for." Indeed it is such second-order effects that have come under attack by environmental economists in recent years.
