The reason a subsidy raises the price of the subsidised

A grant is introduced to make a thing more affordable. Two years later the posted price has risen by close to the grant, the buyer is roughly where they started, and the seller is not. Every announcement about the programme described it as help for buyers, and in the legal sense it was.

What everyone sees

A subsidy is read as a transfer to whoever the cheque is written to. That reading confuses statutory incidence with economic incidence — the question of who bears or captures a payment after prices have adjusted. The two coincide only under conditions that are rarely checked before the programme is designed.

What is actually happening

Standard incidence analysis, as set out by Fullerton and Metcalf, shows that the division of a subsidy between buyer and seller is determined by the relative elasticities of supply and demand, not by who is nominally paid. Where supply is slow or costly to expand — constrained land, accredited seats, licensed capacity — additional purchasing power meets a fixed quantity and clears through price. Turner’s study of federal student grant aid estimated that a substantial share of the grant was captured through reductions in institutional discounts rather than reaching students, and the wider literature on aid capture remains contested, with estimates ranging from near-total capture to near-none depending on sector and identification strategy. The direction is robust even where the magnitude is not.

Why it stays hidden

The capture hides because the counterfactual is unobservable. Nobody can see the price the market would have posted without the programme, so the observed price rise gets attributed to demand, inflation or quality improvement. The recipients also genuinely receive the money — the transfer is real, it simply does not stay.