regions, businesses in those regions will feel less pressure to become more efficient. Similarly, it is oftenthecase that weakerregionspursue more socialist policies, as isthe casewiththenorthern parts of Sweden and the French-speaking parts of Belgium. Without regional subsidies, there would be greater pressure for these regions to reduce taxes and other obstacles for business activity. This illustrate again that not only could subsidies be bad for those who have to pay for the subsidies, they could perhaps be bad even for those that are subsidized. And even in the cases where subsidized sectors do benefit, the benefits will be reduced by the lower competitive pressures, while no such mitigating factor exists for the rest of society that have to pay for these subsidies.
Yet there are also those that argue certain violations of the principle of free competition and globalization could be good not only for a limited special interest group, but for the overall economy. I will comment on and disprove the two most common arguments.
One common argument is that certain companies or industries will supposedly bring greater benefits to society and must so be subsidized. This argument is most frequently used with regard to sectors with a high level of research and development. The Lisbon Agenda for example set a numerical target of 3% of GDP for total R&D spending in the EU10 and in for example Sweden, the government has set a 1% of GDP target for government spending on R&D11.
Yet while few would dispute that R&D is generally a good thing, the resources devoted to it have an opportunity cost , meaning that they could be used in other business projects. The government subsidies of certain industries could have instead been used to reduce corporate income taxes that discourage investments in general. As pointed out in the chapter on “strategic trade policy” (which is meant to mean both direct subsidies and barriers on import meant to benefit domestic companies) in Paul Krugman’s and Maurice Obstfeld’s book “International Ecconomics-Theory
1 0 h t t p : / / w w w . l s e . a c . u k / c o l l e c t i o n s / p r e s s A n d I n f o r m a t i o n O f fi c e / n e w s A n d E v e n t s / a r c h i v e s / 2 0 0 6 / C E P _ L i s b o n A g e n d a R e search.htm http://www.dn.se/opinion/debatt/alliansens-dyraste-reform-blir-satsning-pa-forskning-1.594143 - 11