“Call it the Paradox of Subsidies. Why do you subsidize something? To make it cheaper. What is the actual effect? To make it more expensive.”
The greater the subsidy, the more money flowing in to the sellers of a product or service, the less incentive they have to reduce costs …
Hence the treadmill effect created by the Paradox of Subsidies. The more the government subsidizes something, the more expensive it gets — which requires higher subsidies to get the same results, which increases the costs even more — which requires still higher subsidies, and so on. And then some myopic observer … comes along to declare that the free market is broken and government needs to take over.
… What was the actual intention of the subsidy? … The intention was to hide its cost from the consumer. The intention was to tell the consumer he can buy as much of it as he wants without regard for cost.
… in shielding the consumer from considerations of cost, subsidies shut down the mechanisms that would actually, in fact, make something cheaper.
… What drives down prices in the rest of the economy, outside of government-subsidized bubbles … is innovation spurred forward by competition.
All of that happens because producers and consumers are responding to price signals.
But when customers are insulated from prices, they have less incentive to reward the innovator who disrupts the status quo.