Show Yet, some cross subsidies are inevitable, and you can find them even in the free market whenever a company sets a price for a product which applies to units sold in different places and under different conditions. From: Research in Transportation Economics, 2005
May 04, 2022 May 04, 2022/
Cross subsidization is the practice of funding one product with the profits generated by a different product. This means that one group of customers is paying for the consumption of other customers. This situation arises when the public transit fares in densely populated areas are set somewhat higher in order to pay for artificially low transit fares in less-populated areas where the government is trying to encourage the use of public transit. Example of Cross SubsidizationJeff, George, and Harry order meals that cost $20, $25, and $30, respectively, and are then charged $75 for the three meals on a single bill. If each one of them pays $25, Jeff is cross subsidizing Harry for $5, since Jeff is paying $25 for a meal that cost $20, while Harry is paying $25 for a meal that cost $30. May 04, 2022/ Cross subsidization is the practice of charging higher prices to one type of consumers to artificially lower prices for another group. State trading enterprises with monopoly 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 (including broadband accesses), postal services, electricity tariffs, and collective traffic 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. CriticismAccording to Osmo Soininvaara, 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 risks 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.[1][2] Some economists argue that cross subsidization in state owned enterprises increases the likelihood of anticompetitive practices such as predatory pricing.[3] 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.[4] See also
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As most consumers assume, typical product pricing relies on the basic rules of supply and demand. But you may sometimes pay more or less for a product because the company that produces it has implemented different, highly strategic pricing tactics. One of these tactics is called product-cost cross-subsidization. How It Works
Determining Basic Product Cost
Benefits of Product-Cost Cross-Subsidization
Disadvantages of Product-Cost Cross-Subsidization
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