Cross subsidization is the practice of charging higher prices to one type of consumers to artificially lower prices for another group.
State trading enterprises
State trading enterprises are enterprises authorized to engage in trade (exporting and/or importing) that are owned, sanctioned, or otherwise supported by government. STEs are legitimate trading entities and are subject to GATT rules. Examples i ...
with
monopoly
A monopoly (from Greek language, Greek and ) is a market in which one person or company is the only supplier of a particular good or service. A monopoly is characterized by a lack of economic Competition (economics), competition to produce ...
control over marketing agricultural exports are sometimes alleged to cross subsidize, but lack of transparency in their operations makes it difficult, if not impossible, to determine if that is the case.
In many countries,
telecommunications
Telecommunication, often used in its plural form or abbreviated as telecom, is the transmission of information over a distance using electronic means, typically through cables, radio waves, or other communication technologies. These means of ...
(including
broadband access
In telecommunications, broadband or high speed is the wide- bandwidth data transmission that exploits signals at a wide spread of frequencies or several different simultaneous frequencies, and is used in fast Internet access. The transmission m ...
es),
postal service
The mail or post is a system for physically transporting postcards, letters, and parcels. A postal service can be private or public, though many governments place restrictions on private systems. Since the mid-19th century, national postal sy ...
s, electricity tariffs, and
collective traffic
A collective is a group of entities that share or are motivated by at least one common issue or interest or work together to achieve a common objective. Collectives can differ from cooperatives in that they are not necessarily focused upon an e ...
among others are cross-subsidized. In some cases, there is a universal price ceiling for the services, leading to cross subsidies benefiting the areas for which the costs of provision are high.
Criticism
According to
Osmo Soininvaara
Osmo Heikki Kristian Soininvaara (born 2 September 1951 in Helsinki) is a Finnish politician and writer, former party leader and cabinet member.
Personal life
Soininvaara has a licentiate degree in statistics. Before his political career he ...
, political economics author and statistician and Finnish parliamentarian, cross-subsidy leads to welfare losses for passengers in urban areas, arguing that even if there are reasons for subsidizing public transport in sparsely populated areas, it is better to provide subsidy from general taxation rather than have passengers in more densely populated areas provide subsidy by directing profits from reinvestment in these services. This results in higher fares, lower staff wages, lower frequencies and older vehicles on popular services, reduce the attractiveness of services and spreading
financial risk
Financial risk is any of various types of risk associated with financing, including financial transactions that include company loans in risk of default. Often it is understood to include only downside risk, meaning the potential for financi ...
s of unprofitable services to profitable services and can result in cuts to profitable services to cover expected and unexpected losses. Cross-subsidy puts the financial burden for unprofitable services on passengers who often have the least ability to pay. He also notes that in sparsely populated areas, cars are often more ecologically friendly than buses.
Some economists argue that cross subsidization in state owned enterprises increases the likelihood of anticompetitive practices such as predatory pricing. They argue that regulators, such as U.S. postal regulators, should monitor a state monopoly's cost allocation to ensure that revenue generated in the monopolized market is not used to lessen competition in competitive markets.
[J. Gregory Sidak, Maximizing the Postal Service's Profits from Competitive Products, 11 J. COMP. L. & ECON. 617 (2015)]
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See also
* Feebate
Feebate is a portmanteau of "fee" and "rebate". A feebate program is a self-financing system of fees and rebates that are used to shift the costs of externalities produced by the private expropriation, fraudulent abstraction, or outright destructi ...
* Subsidy
A subsidy, subvention or government incentive is a type of government expenditure for individuals and households, as well as businesses with the aim of stabilizing the economy. It ensures that individuals and households are viable by having acc ...
References
*
{{Authority control
United States Department of Agriculture