A subsidy is defined as a payment, generally made from public
resources, that reduces the price that a buyer pays for a
good or service below the price at which the seller provides
it. The difference between the sellers’ price and the buyer’s
price is the amount of the subsidy.
A subsidy can be analyzed as a negative tax. The effect of a subsidy on the quantity produced and the quantity consumed is just the opposite of the effect of a tax – with a subsidy, the quantity demanded of the subsidized good or service generally increase. Agricultural input subsidies are one of the most common subsidies employed as policy instruments in the agricultural sector in order to lower the prices that farmers pay for their inputs (such as fertilizer, seed, and equipment) below their market prices.