Public Price Discrimination and Aid to Low Income Groups

Abstract

Recently considerable attention has been paid in the literature and elsewhere to forms of aid to the poor involving income supplementation. Far less effort has been devoted to the analysis of another form of aid that is extensively used both in this country and elsewhere; that of the public provision of certain goods and services to low income groups at reduced or zero prices. This type of aid can be viewed as a form of price discrimination, with some groups, by virtue of their lower incomes, paying lower prices for certain commodities than other groups. Schemes of this kind are widespread. In Britain the central government and local authorities discriminate in favour of low income groups by lowering the price to them of, inter alia, higher education, via the means tested grants for students programme; housing, via the rent rebate schemes introduced in the 1972 Housing Finance Act; and health care, via the exemptions from prescription, dental and optical charges. There are also a large number of schemes operated by local authorities on a discretionary basis which lower the price to the poor of a wide variety of items: examples include school maintenance and clothing allowances, the provision of meals for the elderly, and free telephones and other equipment for the handicapped. In all, some 43 programmes can be identified as basically schemes for price discriminationi; and even this total excludes some of the more minor schemes operated within the Health Service. (The total was arrived at by subtracting from the list of means-tested benefits provided by Meacher, 1972, Appendix 5, those schemes involving direct income supplementation or tax relief: supplementary benefits, family income supplement and rate rebates.) Nor are they confined to this country: the US food stamp programme, for instance, is designed to lower the price of food to the poor at a cost of $1,522 million to the Federal Government in 1971 (Statistical Abstract of the United States, 1972, Table 133). Out of a number of possible questions that could be asked about these programmes, I shall confine myself to those concerning the objectives that such programmes might have and the pricing policies that should be pursued in order to achieve those objectives. In the first section I consider the case of a government departmentfwhich has