What is Cross-Subsidization?

By : Neha Dhyani

Updated : Jun 3, 2022, 9:06

The practise of charging different prices to different consumer groups is known as Cross-Subsidization. When higher prices are charged to one group of consumers to charge a subsidized lower price for another group of consumers, it is called Cross-Subsidization.

Cross-Subsidization Example

Let us understand Cross-Subsidization with the help of an example. To generate and supply one unit of electricity, the cost is the same irrespective of the consumers to whom the electricity is being supplied. However, each consumer or consumer group may be charged a different tariff. Such as, domestic consumers are charged a lower rate than industrial consumers. In such a case, domestic consumers are said to be cross-subsidized by industrial consumers.

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For the past few decades, there has been a growth in electricity consumption by the agriculture sector. In India, electricity supply to the agricultural sector is done for free or at subsidized rates. Due to this, there has been an increase in the cross-subsidy burden on industrial and commercial consumers, deterioration in the financial health of the electricity distribution companies and a massive financial burden on the state governments as direct subsidies.

The above scenario is just one example from the power sector. In India, Cross-Subsidization is very prevalent in sectors such as power, healthcare, aviation and higher education.

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Cross-Subsidization Advantages

If we are to look at the advantages of Cross-Subsidization

  • one can say that Cross-Subsidization is beneficial for transforming and enabling greater social efficiency.
  • Consumers end up paying the socially economic price.

Cross-Subsidization Disadvantages

However, there are a few disadvantages of Cross-Subsidization too.

  • When the price of one product or service is reduced, and that of the other is increased one may quickly lose the market share of the overpriced product
  • It unfairly puts a higher financial burden on one group of consumers
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FAQs on Cross-Subsidization

Q1. What are some of the sectors in which Cross-Subsidization is common?

Cross-Subsidization is prevalent in sectors such as power, healthcare, telecommunication, health insurance and higher education.

Q2. What is Cross-Subsidization?

To charge artificially low prices to one group of consumers, high prices are charged to another group of consumers. This practice is known as Cross-Subsidization.

Q3. What is the benefit of product cost Cross-Subsidization?

Growth in business due to pricing value is one of the major benefits of the product cost Cross-Subsidization. By using this strategy, upward growth will be visible in the business, and if the quality of the product being sold and customer services being provided are on par with that provided by competitors, the chances that indecisive customers will buy your underpriced product are higher.

Q4. What are the issues of product cost-cross subsidization?

Some argue that product cost Cross-Subsidization can lead to a decline in your business as competitors may undercut you and charge a lower price for the overpriced product. Also, there is an argument that Cross-Subsidization unnecessarily and unfairly puts a financial burden on one class of consumers, and this leads to a lack of transparency in product pricing.