The cost of government subsidy programs
Policy makers and citizens alike often complain that the cost of government subsidy programs almost invariably exceeds initial projections. One reason for this is the increase in the quantity of the good purchased resulting from the subsidy. Prior to the enactment of the textbook subsidy, 100 million textbooks were sold annually. With a subsidy of $20 per textbook, one might be inclined to think that the annual cost of the program will be $2 billion ($20 X 100 million). This figure, however, will underestimate the true cost. Once the subsidy is in place, textbook sales will increase to 110 million, driving the overall cost of the program up to $2.2billion ($20X 110million).
Furthermore, the expenditures on the subsidies will understate their total costs. To finance the subsidies, the government will have to raise the funds through taxation. A subsidy granted in one market will require taxation in other markets. As we have previously discussed, the taxes will generate a deadweight loss over and above the revenues transferred to the government. This excess burden is also a cost of the subsidy payments.
Offset foreclosure costs
The buffer also provides a margin to cover professional foreclosure costs. Many legal systems, particularly in developing markets, are biased against creditors. Banks are often better placed than other creditors but there are still significant legal and professional costs associated with foreclosure.