Subsidies for the Non-Specialist

A Tale of Two Regular Folks and their Encounter With Federal Market Intervention: (Subsidies for the Non-Specialist)

Beth and Bob are two regular people.  They live next door to each other, in identical homes.  They are both entrepreneurial and work hard at their jobs.  Both have second jobs, too - just to make ends meet.  There is just one difference:  one of them always seems to be slightly better off than the other.

Please note that this example illustrates the basic concepts of existing federal market intervention.  It does not depict actual federal programs.


Beth's Home and Businesses

Bob's Home and Businesses



Beth put in a redwood hot tub and may deduct 10% the cost from her federal tax bill due to the 10% domestic large timber tax credit.

Bob's hot tub, made of porcelain, is not eligible for federal tax credits.


Beth built a turtle racing stadium.  Since the construction of stadiums may use tax-exempt bonds, Beth got a lower interest rate.

On weekends, Bob built nursing homes.  While he, too, financed his work with bond issues, his bonds were not tax-exempt.  Thus, he paid a higher interest rate.


Beth deducted the all the interest on her 30 year mortgage in the first 4 years, and was able to put her tax savings in the bank.

Bob must deduct mortgage interest from his taxes over the 30 year life of the mortgage.


Beth invested $10,000 in a California artichoke farm to build a nest egg for her kids.  The farm is rapidly losing money.  However, under special passive loss provisions for artichoke farmers, Beth can deduct $20,000 per year from other income to reflect her artichoke losses - even though she put no more money in.

Poor Bob chose to invest in his nursing homes project.  Unlike the artichoke industry, nursing home losses are limited to the funds actually put at risk.



Since Beth painted her house purple, the government gave her $4,000.

Bob carelessly chose taupe and got nothing from the feds.

Direct federal ownership of facilities/service operations, net of user charges

Prior to buying her own house, Beth lived a government-owned mansion and paid a monthly rent of only $5.

Bob paid market rents prior to his home purchase.

Research and Development Support

Beth needed a new machine to remove the radon from her basement.  To solve her problem, the federal Office of New Machines came in and designed, built, and tested it for her.

Though Bob had no radon problems, he did have some unmarked metal drums that kept surfacing in his kid's sandbox.  The Office of New Machines was too busy with radon removal R&D to have time for unmarked drum R&D.

Market Planning

Beth's Pet Rocks came from a single quarry.  If supplies were cut off, she was in trouble.  Luckily, the Office of Strategic Stones and Stuff had done scenario planning to locate alternative sources of supply and had stockpiled key rocks for such an emergency.

Bob runs a retail magazine franchise.  When Bob's main magazine supplier cut him off for not selling enough Pewter World subscriptions, he was forced to make 47 phone calls over a two month period before he located a new source of supply.

Subsidized loans, loan guarantees, and insurance programs

Because she lives in a Quarry Development Region, Beth got a below-market fixed-rate mortgage from the government.  In addition, the government promised to make good on any unpaid principle should Beth not be able to make her payments.

Bob had a bank mortgage with fluctuated with the prime rate.  Should he fail to make any payments, the bank could seize his home.

Administrative and Regulatory Costs

Beth created a great deal of work for the government.  Somebody had to plan and manage handling her radon cleanup, legal suit and mortgage.  These people worked very hard, but Beth wasn't the one that had to pay them.

Bob paid for all of the work his activities created through his mortgage rates, taxes, and of course, lawyers fees for the little mess in his back yard sandbox.


Assumption of Legal Risks/Indemnification

Prior to discovering her radon problem, Beth had rented her basement room to a couple who was now experiencing health problems.  Luckily, she had received blanket federal indemnification for all accidents, spills, etc. associated with her home or business.  She told the couple to go sue the federal government.

Bob was not so lucky.  Federal researchers discovered that he had once spilled some gasoline in his back yard while refueling his lawn mower.  Under the joint and several strict liability provisions of Superfund, poor Bob was individually responsible for mitigation of all pollution associated with the mysterious drums in his back yard.

Changes in Market Rules Governing Access to Markets, Prices, or Terms of Sale

Beth built an addition to her home using whatever contractor and construction material she wished.

Not Bob.  Since his house was taupe, not purple, he had to use Henry's House Builders and pay a significant price premium.  Furthermore, the Regulations for Owners of Taupe Homes stipulated that he could sell his home only in an even-numbered year.

Federal Procurement Policies

When Beth lived in her government-subsidized mansion she was a government employee responsible for purchasing all necessary food items for her department.  In accordance with the "Truffle Promotion Act of 1832," she purchased hundreds of truffles per month from the nation's four truffle manufacturers.

When Bob needed food, he bought it at market rates in the neighborhood Quick Mart.

Doug Koplow and Alliance to Save Energy, 1993

Source:  Doug Koplow, Federal Energy Subsidies:  Energy, Environmental, and Fiscal Impacts, (Washington, DC:  Alliance to Save Energy), 1993, pp. 43-44.