Cross subsidization is the practice of charging higher prices to one group of consumers in order to subsidize 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.
If you go to dinner with 2 of your friends, and Leo's meal costs $15, Lin's meal costs $20, and your meal costs $25, the total bill is then $60, and everyone decides to split the bill evenly, everyone pays $20. In effect, you are undercosted, and Leo is cross subsidizing you. An example of cross subsidization may occur in the banking industry. Fees associated with maintaining a low account balance (below $1,000 for example) are charged to these customers to maintain their profitability.
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 where the costs of provision are high.
According to the Finnish member of parliament, political economics author and statistician Osmo Soininvaara, cross subsidization causes welfare losses. Even if there were reasons for subsidizing bus or train ticket prices on sparsely populated areas, it is better to collect the required money by general taxes instead of raising prices on profitable areas that better suit for collective traffic. He also notes that in sparsely populated areas, cars are often more ecologically friendly than buses.
- This article incorporates public domain material from the Congressional Research Service document "Report for Congress: Agriculture: A Glossary of Terms, Programs, and Laws, 2005 Edition" by Jasper Womach.