The effects and policy implications of state aids to industry: an economic analysis

The use of state aids to industry is a poorly understood part of competition policy. Currently, the EU Commission presumes that state aids distort competition, yet it approves 98% of applications, often for social or distributional reasons. We argue that proper regulation of state aids should focus on two issues, the externalities generated and the inefficiencies arising from failures in competition between governments. We thus develop a new framework for EU policy and compare its implications with the existing practice of the EU Commission.