Government Subsidies

• Specific Activity: Firms are often given subsidies to encourage particular actions, such as training employees, reducing pollution, implementing specific production techniques, or developing new technologies. Farmers receive federal subsidies to reduce the problems caused by unstable agricultural markets.


• Local Growth: State and local governments have a long history of inducing firms that employ a number of workers to locate in their areas through generous subsidies.


• Public Utilities: Privately-owned public utilities or quasi-public transportation systems are often subsidized by the government because they provide valuable production that cannot be profitably exchanged through markets.


• Bankrupt Firms: On occasion, a nationally prominent firm on the verge of bankruptcy is subsidized to help it through difficult times.


• Friends of Government: And more than a few special "breaks" have been inserted into tax laws by members of Congress on behalf of a particular firm that may or may not be the direct result of a hefty campaign contribution.

Surplus of Government Enterprises

One common example of a government enterprise is a city-operated electrical generation and distribution system. In some cities, this service is provided by private, for-profit, businesses. In other cities it is provided by government. Other examples of government enterprises include urban transportation systems, parks and recreational facilities, and communication systems.

The primary difference between private firms and government enterprises, especially in the National Income and Product Accounts, is the treatment of profit. In a private firm, any profit generated (the difference between revenue and cost) is claimed by the owners, or the entrepreneurs. A government enterprise, in contrast, has NO specific owners to claim the profit. In essence the enterprise is owned by ALL citizens. As such, the "profit" of government enterprises is not earned by any specific factor of production. It is not considered part of national income.

From a practical standpoint, the excess of revenue over cost for a government enterprise, which is termed "surplus" rather than profit, is merely returned to the appropriate government treasury. Should the city's electric utility "turn a profit" in a given year, this surplus is given back to the city. This is fitting because should the electric utility incur a loss, then the city makes up the difference.