Pricing Strategies That Combat Social Injustice

December 26, 2019, Feature, by John L. Crompton, Ph.D.

2020 January Feature Pricing Strategies That Combat Social Injustice 410

The key descriptors of social justice are “equality” and “fairness.” In recent years, the term has been extrapolated to a wide range of contexts, including environmental, race, gender and human exploitation. However, in its earliest forms it primarily was concerned with income inequality. In contemporary U.S. society, an explicit element of social justice remains the redistribution of resources to those who are economically disadvantaged. Pricing strategies play a role in exacerbating or amending social injustice in the context of parks and recreation.

Tension in public-sector pricing debates revolves around optimizing the two guiding concepts of fairness: The Benefit Principle and the Ability to Pay Principle. The Benefit Principle states that residents or service users’ contributions should reflect the benefits they receive from a service. The Ability to Pay Principle states that the price or amounts of tax to be paid should reflect people’s different ability to pay and that, as much as possible, no residents should be excluded from participating because they lack the funds to do so. The challenge for public decision makers in arriving at a price perceived to be “fair” is how best to reconcile these two principles.

Making the Ability to Pay Principle Operational
Not giving discounts to those who qualify as economically disadvantaged both unjustly excludes residents from a service and forgoes revenues. The conventional view is that program discounts for low-income residents guided by the Ability to Pay Principle inevitably result in trade-offs with the Benefit Principle, since they reduce revenue and require more tax support.

However, Figure 1 (see pg. 38) illustrates this is often not the case, because low-income residents have a different price elasticity than other groups. If a discount price exceeds the cost of delivering a service, then this revenue — from those who would not participate at the regular price — is a net gain. Consider the following example:

A large outdoor, public swimming pool that opens for the summer months charges an admission price of $7 per person for those age 4 years or older. On average, the pool receives 200 visits a day. Almost all its costs are fixed. For an economically disadvantaged family of five, $35 for admission is not feasible, so they are excluded. If a discounted price of $3 is made available, the family of five pays $15. If the $3 price resulted in an additional 100 visits a day from economically disadvantaged individuals, this would result in more than $2,000 a week in additional net revenue for the park and recreation agency.

In accordance with the Ability to Pay Principle, park and recreation agencies could offer price discounts to four groups of potential users:

Low-Income Residents – Establishing a qualifying benchmark income level that defines a “poor” individual is controversial, requiring additional administrative steps to verify and audit compliance that could become intrusive. Recreation agencies typically adopt criteria already used by others, such as schools for their subsidized meals programs, welfare and unemployment agencies, to determine those eligible for discounts.

Unemployed Residents – Unemployment is devastating to most who experience it. Recreation programs can offer relief from boredom and give some structure, order and routine to each day for the unemployed. Agencies have the potential to mitigate the isolation and exclusion caused by removal or disruption of social interactions with colleagues.

Children – Leisure literacy is as important to a satisfying life as reading, writing and numerical literacy. The absence of such skills could lead to deviant behavior that inflicts great costs on society. Investing in youth by giving them meaningful discounts allows park and recreation agencies to nurture their future clienteles.

Large Households – Larger families have more expenses to meet and are economically disadvantaged compared to smaller families. Traditionally, agencies offer family passes to these households.

Inequality from Discounting Prices for Economically Advantaged Residents
A government’s main source of revenue for subsidizing local and state park and recreation services are regressive property and sales taxes, which require those with lower incomes to pay a higher percentage of their income in taxes. This is inconsistent with the Ability to Pay Principle.

Using regressive taxes to support services primarily used by residents who are not economically disadvantaged results in an inverted, distorted price system in which the wealthier segments of society are supported by those at the lower end of the income scale. This is illustrated in Figure 2 (see pg. 39) by a “line of incongruity.” The blue and green lines indicate that low-income groups should receive a subsidy in accordance with the Ability to Pay Principle, but other groups should pay for benefits they receive in accordance with the Benefit Principle.

Charging a break-even price alleviates some of the financial burden on those with low incomes, provided those with low incomes do not use the service. The appropriate policy is to charge the break-even price to higher income cohorts and meet the Ability to Pay Principle by giving discounts to low-income users, rather than offering the service to everyone at a reduced price. This gives lower-income groups the option of whether they want to use a service, rather than requiring them (and non-users in all other income cohorts) to pay for a service they don’t use through the regressive tax system. Discounts would be inappropriate for both seniors and those who purchase a multiuse pass because each case violates both the Ability to Pay and the Benefit Principle.

Capture Consumers’ Surplus with Premiums
The consumers’ surplus (see Figure 1) that is inherent in the pricing of public leisure services can be captured by premiums. Premiums for those willing to pay for increments of benefits beyond the standard offering is consistent with the Benefit Principle for those who want to save their time by making a reservation, use a facility or program at peak times, or desire a higher-quality offering than the regular service provides.

Reservation Options – The price people pay to engage in a recreational experience includes both their time and money. People cite lack of time as a major reason for not participating more in a leisure activity. Whenever time savings can be achieved by offering a reservation option for the experience, a premium can be added to a program’s price.

Peak-Time Priority – The primary parameters setting peak times are the traditional work week and educational institution schedules and, in the case of outdoor recreations, the weather. For many potential users, these parameters dictate the times of the day and days throughout the year when they can participate. Some users who are not constrained by these parameters (e.g., retirees, pre-schoolers, part-time workers, college students, the self-employed) also choose to participate at peak times. For such groups, peak-time use is a matter of convenience rather than necessity. Providing an incentive may persuade these individuals to shift their use to non-peak times.

Whenever peak demand is reached, and some potential users are unable to participate, then agencies are likely to come under pressure to add capacity. This leads to inefficient use of resources, because if facilities are designed with sufficient capacity to accommodate peak demand, then much of this capacity remains unused the rest of the time. Since peak-time users are responsible for a disproportionate amount of the facility’s cost compared to off-peak users, the Benefit Principle directs they should pay a premium that covers this cost.

Superior Quality Increments – A recreation and park system likely incorporates facilities that deliver similar services, but offer different levels of quality. Superior quality increments stem from three sources: (i) variations in quality among facilities; (ii) variations in preferred locations within a facility; and (iii) added service opportunities. Most are likely to accept that those who use a higher quality facility or program should pay a higher price. The higher quality likely requires higher development and maintenance costs, so the price premiums for these extra increments of benefits should, at a minimum, be set to cover the marginal costs of providing them.

Commercial Use of Public Facilities – Whenever public facilities are used for commercial purposes, charge a premium. This transforms a facility from a public to a private good. Since it no longer is accessible to all, the Ability to Pay Principle is not relevant.

Hosting festivals and events promoted by for-profit entities temporarily commercializes a public space. In many communities, political pressure encourages recreation agencies to host commercial functions, which are perceived to benefit the economy. However, recreation agencies acting as agents of these public, taxpayer-owned spaces have an obligation to negotiate a lease, permit or rent for use of a facility that reflects the full-market rate.

Auctions and Bidding – In contexts where demand greatly exceeds supply, a bidding process or auction can capture consumers’ surplus and extract the maximum premium. This unconventional approach directly involves users in the price-setting process. For example, if multiple teams or leagues seek to use athletic fields at peak times, all interested parties could be invited to bid for those time slots and they would be allocated to those prepared to pay the most. This approach has the added virtue of managers not having to develop (invariably controversial) administrative decision rules to prioritize who should have access to the relatively scarce resource.

Using Pricing as the Vehicle for Distributive Justice
“Distributive justice” frequently is used as a synonym for “social justice.” Government entities are the primary institutions with responsibility to put distributive justice into operation. Pricing becomes an effective vehicle for recreation and park agencies to use discounts to make the Ability to Pay Principle operational; follow the Benefit Principle to remove lines of incongruity; perform due diligence to ensure discounts are confined to the economically disadvantaged; and use premiums to capture consumers’ surplus that follows the Benefit Principle.

John L. Crompton, Ph.D., is a University Distinguished Professor, Regents Professor and Presidential Professor for Teaching Excellence in the Department of Recreation, Park and Tourism Sciences at Texas A&M University and an elected councilmember for the City of College Station.