Which of the following best defines a subsidy?

A subsidy is best defined as a direct financial aid provided to businesses. This financial support can take various forms, such as grants, tax breaks, or direct payments, and is designed to lower the cost of production or encourage certain economic activities. By providing subsidies, governments aim to boost domestic industries, make essential goods more affordable, stimulate investment, or support growth in specific sectors.

For instance, a government might provide subsidies to renewable energy companies to encourage the development of clean energy technologies. This financial assistance enables corporations to invest more heavily in their operations without bearing the entire burden of those costs, effectively promoting economic growth and innovation.

In contrast, a tax on imports focuses on protecting local industries through tariffs, which is unrelated to direct financial support. Similarly, while a cost incurred by the government can be a consequence of implementing subsidies, it does not define what a subsidy actually is. Lastly, controlling inflation is not the primary purpose of subsidies; they are primarily aimed at supporting business development rather than managing price levels. Thus, the best definition of a subsidy highlights its role as financial aid aimed at benefiting businesses and fostering economic activity.