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

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