Making Goods Affordable for Poor

Tuesday, September 18, 2007

That suggestion has been criticised on the ground that the market is not geared to cater to the poor. Many people oppose the market mechanism even though poverty is generally less in market economies than in government-controlled socialist ones. Here is an issue that deserves further discussion.

Basically, there are two ways of giving the poor what they need at a price they can afford. One – the ideal one – is to convert that need into a public good. The second method is to add frills and luxuries to a basic need, sell it to the rich at profit, and use that profit to subsidise the poor, who then get the essential part of the service at an affordable price or even free.

Viable examples

The street-light is a good example of a public good. It shines on the poor beggar with the same intensity as on a rich tycoon walking to his BMW; it makes no discrimination between the rich and the poor. The second option of cross-subsidy has been successfully used in hospitals, schools and in public transport too. The best example of cross-subsidy is the way Lord Venkateshwara gives darshan in Tirupati: It is absolutely free for those who cannot pay, for anyone who does not want to pay. It is worth noting that in His case, no attempt is made to check whether those who demand free darshan are truly poor or not.

It is left to the individual?s choice whether to pay and stand in a shorter queue, or stand in a longer one to get the same service free of charge. By leaving the decision to the customer, the Tirupati temple has saved itself considerable headache, and avoided corruption too.

In India, many people are so poor that they will not be able to enjoy many services unless they get it free. So, a free component of service is important. It is equally important that, in essentials, the service should be no different for the poor compared to the rich. It would not do for the Tirupati temple to show the poor a pseudo idol, reserving the genuine one for the rich donor.

Government schools are free but, in a number of cases, there is next to no instruction. The service may be free but quality is not genuine. Hence, there are two conditions to be satisfied in catering to the poor. One, the price must be low enough to be affordable; ideally, it should be free. Two, even if there are no frills, the essentials should be held sacred.

Marginal cost

As shown in the Diagram, the supply curve tends to go flat for a public good; it costs nothing extra to add one more customer. In economic jargon, the marginal cost (Curve A) of a public good tends to zero. Scarce goods are the opposite: Their marginal cost tends to increase for each addition to supply (Curve B?). Real-estate is a classical example of scarce good; the slightest increase in demand raises costs sky-high.

Computer chips are a good example of marginal prices being much less than the average: If it costs a million rupees each to produce the first thousand units, it may cost only a thousand rupees to produce the next million, and only hundred rupees thereafter.

In such a case, the first million may be sold for thousand rupees and thereafter, the same chip may be sold for two hundred rupees, and yet yield profit. In fact, the best time to buy any computer product is tomorrow.

Then, the poor may be sold last year?s fashion (but a usable one) at bargain prices. The same thing can be done, is done, for perishable commodities.

Aeroplane seats and hotel rooms are examples of perishable products. An airline seat or a hotel room left unfilled is a loss forever. Hence, it is worthwhile for an airline to sell seats that would otherwise go empty at throwaway prices. Often, the person sitting next to you in an airline would have paid a fraction of what you paid.

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Source: Sify Business (link opens in a new window)