HomeMy WebLinkAboutTreating Equals Equally: Common Abuses in pricing Public Services TREATING
EQUALS
EQuAIL,Ly
Common Abuses in
• • Services
PSricin Public
by John L. Crompton
T HE FIRST REQUIREMENT OF any public recrea Thus, the seller shares such expense savings with the
tion and park agency in establishing prices for its purchaser of large quantities.
services is that the prices should bef air: A dimen- • Incentive to a buyer to purchase only from a given
sion of fairness is what economists call "horizontal seller rather than buying from multiple sources.
equity" —that equals should be treated equally. • An inducement for clients to purchase more of a
This article describes three contexts in which this rule good or service than they would otherwise have done.
calling for fair treatment is frequently broken. These con- I n contrast to the use of quantity discounts by commer-
texts are offering of season and multi -use discount passes; cial enterprises, in most instances where quantity dis-
discounts for senior citizens; and the fee structure for counts are offered by park and recreation agencies it ap-
youth recreation activities. pears that benefits accrue predominantly to service users
Season and multi -use discount passes are used in rather than to the agency. In such cases, direct users gain
swimming pools, golf courses, and performing arts cen- at the expense of40,lther citizen&
ters, among other facilities. in essence, these passes are
what the private sector would term "quantity discounts." D ecreation and park agencies are stewards of
When commercial businesses offer quantity discounts, 1N. resources entrusted to them by the citizenry,
specific benefits accrue to both the seller and the buyer of Therefore, before season or multi -use discount passes are
the service or product. A business might realize: issued, an agency must be able to identify the benefits
• Saving in production costs, because larger orders that it or the general citizenry receives from such an ar-
may result in lower cost production runs. rangement in addition to the benefits received by clients.
• Improved cash flow, because a relatively large cash There appear to be four situations in which these benefits
payment is made. may be realized.
• Reduced costs associated with transportation, First, for situations in which there are competitive ser-
because there may be fewer orders to process, ship, and vices, the quantity discount ticket may be an incentive
invoice. for a client to purchase the service exclusively from the
• Reduced inventory and storage costs, because the agency. This is particularly important if this commit -
costs of storage and inventory and the risk of not resell- ment implies a link to other services. For example, a dis-
ing the item are transferred from seller to buyer. count ticket holder at a golf course is likely to rent golf
Reduced selling expenses. Many expenses such as carts and make purchases at the golf shop, concessions,
bring, order - filling, and salaries are about the same and food areas.
whether the seller receives an order totalling $10 or $500. Second, a multi -use or season pass may induce clients
PARKS & RECREATION /SEPTEMBER 1984 67
to purchase more of a service than they would otherwise. The major beneficiary of the $50,000 subsidy is the fre-
A primary reason that arts patrons buy a season ticket is quent swimmer because he or she makes most use of the
because it makes them more certain to attend each per - pool. If it is assumed that every visit to the pool is sub -
formance. sidized by the taxpayers by one dollar, then the second ;::
Third, if a service is operated through an enterprise question becomes: Is it fair that frequent swimmers
fund, then it may be useful to have a guaranteed cash should receive a discounted admission price and receive
flow at the start of a season. It is then possible to plan the greatest benefit from the subsidy?
ahead and develop strategies for resolving likely budget Indeed, a not altogether facetious case can be made
shortfalls over the rest of the season, which reduces the that the frequent swimmer should pay a higher price
risk of not achieving revenue goals. than the occasional swimmer, not a lower price.
Fourth, there may be positive promotional impact. Sewerage charges are frequently based on the volume of
Committed multi -users of a service may be effective waste delivered, with high volume users paying most,
word -of -mouth promotors in the community. because the city has to provide and pay for facilities to get
rid of the waste. The same rationale may be applied to
T here are many instances, however, in which multi- the provision of pools. The primary pressure for building
use discounts may not be appropriate. The first re- and operating them probably comes from heavy users
quirement of any agency's policy is that it should be who will be the main beneficiaries. Because they are the
equitable to every citizen, and offering quantity discounts primary source of the operating deficits, it may be argued
may lead to inequities. they should pay more per visit not less.
Consider the case of a public swimming pool that oper- The only reason a multi -user purchases a discount pass
ates at an annual loss of $50,000. Two questions arise. is because he or she believes that there is a financial ad-
First, why should the taxpayer who swims only occa- vantage to this practice. When an agency operates the
sionally be required to pay more (the full admission only swimming pools available to the general public and
price) for each swim than the taxpayer who swims fre- avoids direct competition, the case for quantity discounts
quently and takes advantage of the multi -use discount? is difficult to sustain. In such situations the most equitable
and efficient price structure requires that all users pay the
same per -visit price and that no multi -use discount
passes be offered.
;'Table` Sometimes it is argued that some users do not take full
1 advantage of the discount passes they purchase; then the
' OVe y Rate (Percent) y agency gains income it would otherwise not receive. The
issue then becomes: Is it fair that people should pay for
65 Years visits they don't use?
Year All Persons and Ov a < ` T he basic purposes of quantity discounts are to stimul-
ate additional demand and to reduce the costs of meeting
1959 22.4 35.2' that level of demand. If these two conditions are not met,
1966 14.7 28.5 then an agency probably should reconsider its use of
1967 14.2 29.5 season and multi use discount passes.
1968 12.8 25
1969 12.1 25.3 °'
1970 12.6 24.5 iscounting prices for senior citizens is a common
1971 12.5 21.6 practice in the parks and recreation field. Indeed, in
1972 11.9 18.6 its 1979 survey of 188 local park and recreation depart
., 1973 ''''''''11.1 16.3 meats across the country, Economics Research Associates
1974 11.2 14.7 reported that as a matter of policy 66 percent of respon-
1975 12.3 15.3 dents offered reduced prices for senior citizens and an
1976 11.8 15.0 additional 16 percent admitted senior citizens free to pro-
r 1977 11.6 14.1 grams for which there was a fee.
1978 11.4 14 The rationale for this senior citizen discount is the
1979 11.7 15.2 assumption that senior citizens are a low- income sector
1980 13.0 15.7 of the population that cannot afford to pay regular prices.
} 1981 14.0 15.3 -` The image of an elderly person struggling to survive on a
1982 15.0 14.6 fixed pension, perhaps supplemented by a meager in-
terest income from modest savings, is a disturbing one.
Source: U.S. Department of Commerce, Bureau of the Cen- Although such an image reflected reality for a Large pro-
sus: Series P -60, Characteristics of the Population portion of the elderly 20 years ago, it is misleading today.
Below the Poverty Level: 1982 Superintendent of There is still a poverty problem in the United States, but
h Documents, U.S. Government Printing Office, people over 65 years of age are now on average no more
Washington, D.C., 1983. likely to be poor than people below 65.
The data in Table 1 trace the remarkable change since
68 PARKS & RECREATION /SEPTEMBER 1984
1
1959 in the economic status of people 65 and over. The
proportion of elderly below the poverty level dropped 4 4
from 35.2 percent in T959 to 25.3 percent in 1969, an
average of one percentage point per year. In the next five T e f i rs t requ i remen t of
years, the impact of antipoverty programs directed at
elderly citizens was most forcefully felt as the poverty
rate for members of this group declined two percentage any agency's pol i that i t
points per year to 14 percent in 1974. Since then, it has
remained virtually static, fluctuating between 14 percent should be equ to every
and 16 percent. However, in 1982 the proportion of
population over 65 below the poverty level was less than citizen, and offering quan t i ty
the proportion of the population under 65 years of age.
The 1980 Census reported that the national average
household income, per person after taxes, was $5,964, d may lead to
while for households headed by people over 65, it was
$6,299. The improvement in the economic status of older in equities . ��
persons is all the more remarkable because these statistics
include only cash income—that is, they do not include
the very important health benefits that Medicare pro-
vides.
Senior citizens have several other financial advan-
tages. They pay less in personal taxes than others at the
same income level because they are entitled to a personal only opportunities for advanced swimming instruction
exemption of $2,000 a year, which is double the exemp- in the community. All active members are children.
tion available to other taxpayers. In general they own Parents administer the club. They handle hiring and
more assets than non - senior citizens at the same income paying the coaches; conduct extensive fund- raising ac-
level; they are, for example, more likely to own their tivities; organize meets and serve as meet officials; and
homes. They usually do not have child- rearing expenses provide transportation for children who wish to compete j
nor work - related expenses, such as commuting costs. in out -of -town meets.
The improved economic status of older people can be The swim club is given the use of several lanes at one
attributed to legislated increases in Social Security of the city pools throughout the year at times of the day
benefits in the late 1960s and the indexation of benefits in that cause minimum inconvenience to other pool users.
1974. Introduction in 1974 of Supplementary Security In- For the use of the pool, my daughter is charged $90 each
come, an indexed negative income tax for senior citizens, year. I have no quarrel with this charge; it is reasonable.
also has had a " bearing on economic status. However, I sense injustice and inequity when I observe
It is easy to sympathize with a reduced price policy for that no charges are imposed on other youth recreation
senior citizens. All of us aspire to reach this position and activities by the city.
would ultimately benefit from such a policy. All the Little League, junior soccer, and junior softball, like the
available evidence, however, suggests that at this time swim club, are operated by nonprofit organizations.
senior citizens are as well off economically as the rest of Unlike the swim club, however, these groups are permit -
t he population. ted to use city facilities without charge. The purpose of
Therefore, to offer price discounts to the older popula- Little League baseball is "to provide an outlet of healthful
tion is to be unfair to the rest of the population. We are activity and a training under good leadership in the at-
requiring that younger people reach into their wallets to mosphere of wholesome community participation." This
enable senior citizens to save money. There is no equita- purpose is the same as the purpose of the swim club.
ble economic reason to support this requirement. Now My daughter's friend who is the same age and lives
that senior citizens are economically equal to the rest of next door plays junior soccer and junior softball. Another
the population, they should be treated equally in agency friend across the street plays Little League baseball and
price structures. junior soccer. Neither of them is required to pay any -
The United States still has a poverty problem, but it is thing to the city for use of the fields. Why is my daughter
found in all age groups and is not concentrated among charged and the other children not charged?
senior citizens. There are many seniors whose income is This year it is likely to cost my city around $30,000 to
marginally above the poverty level, but there are also maintain, irrigate, and operate the new Little League
many non - seniors who may be similarly classified. complex, with floodlights, recently constructed at a cost
of $400,000. Since there are approximately 500 children
in the Little League program, the city is subsidizing each
T he following personal experience illustrates the fair- child in the program to the extent of approximately $60.
necis issues raised in pricing youth recreation ac- The swimming pool, was built for general public use,
tivities. My nine - year -old daughter is a member of the and the swim team is given lowest priority. The sports
local swim club, a nonprofit organization offering the fields were constructed exclusively for the use of the Lit -
PARKS & RECREATION /SEPTEMBER 1984 69
.,
T is still a poverty problem i
..
yp n the
United States, but people over 65 years of age
are now on average no more likely to be
y poor
p
than people below 65.9 9
i
r..1
4
1
tle League club. What differentiates Little League from In areas consisting of predominantly low- income
the swim club? Why does the swim club pay a pool user households, the "no charge for all youth recreation" op-
fee while the Little League club does not pay a field user tion may be the best strategy. In situations in which 'a
fee? youth recreation teams are sponsored by local businesses, l
This vignette illustrates the type of horizontal inequity an alternative may be to include the facility use fee as
that frequently occurs in the pricing structures of youth part of the sponsors' costs. Another solution may be to
recreation programs. The reason for free use for Little call the user fee a "donation," as a means of enabling
League is probably historical. In the old days, the games low- income families who cannot afford the charge to I
were played on an undeveloped farmer's field. Parents avoid it.
built whatever improvements were necessary, mowed To offer youth recreation activities free when a
the grass, marked and dragged the fields, and performed relatively small proportion of users are from low - income
other maintenance tasks. families may be expedient. However, this approach is in-
Over time this situation has changed. In many cities, creasingly perceived to be unsatisfactory by many agen-
these functions are performed by city staff on city -built cies because of its adverse impact on revenues.
facilities and improvements. In my community, junior Consider the implications of pursuing this policy for
soccer and junior softball have been able to take advan- my city. Suppose the swim club is given free use of the
tage of the historical precedent of free use by Little pool. To be equitable and treat equals equally, the city
League because they are similar types of activities. must also offer free use of pools to all children who are
not members of the swim club. Clearly, it is inequitable to
A n additional dimension to the inequity issue arises give club members free admission and exclusive use of
when my second daughter's main recreation in- some lanes, while other children who do not have these
terest— roller skating —is considered. The rink in our city privileges are required to pay. Because the primary
is operated by an entrepreneur; the city provides no swimming pool users are children whose admission
roller skating opportunities. A two-hour session costs represent a substantial source of revenue, cities are reluc-
$2.50. The city does not offer her a $60 subsidy. Why is taut to initiate such a policy.
she discriminated against because her preference hap- There is an "opportunity cost" associated with •
pens to be roller skating rather than Little League, soccer, revenues the city foregoes by not imposing a price. The
or softball? revenues that would accrue from this source could be
Indeed, her case for a subsidy may be stronger than used to provide additional recreation opportunities for ii
that of her friends who play Little League. The city did young people. Assume that the city has a fixed number of i
not have to invest $400,000 of taxpayers' money in build- dollars to spend and that the recreation department has
ing the facility that she uses. Instead, the private sector programs it cannot offer because it lacks funds. The ab- z •
paid for it at no cost to the taxpayer. Because she receives sence of these revenues means that additional youth
no capital improvement support from the city, is it not recreation opportunities will not be scheduled.
equitable that she should receive a greater participation
subsidy? A further problem with free use for youth is that
If horizontal equity is to be achieved, the city is faced families with children in youth recreation programs
with two alternatives. The first is to permit all organiza- are unable to demonstrate a willingness to contribute s
tions offering youth recreation opportunities to use city toward the cost of the programs. If parents are not pre -
facilities without charge. This approach ensures that pared to demonstrate their support by at least partially t
children from low - income families will not be excluded offsetting the program's costs, it is unreasonable of them
because of inability to pay. In the example used earlier, it to expect people without children in the program to
is pos9lble that low- income children can be excluded recognize it as worthy of subsidy through the tax system.
from the swim club because of the requirement to pay a It is sometimes argued that because society fully subsid-
$90 per year pool use charge. izes other types of education through the public school
70 PARKS & RECREATION /SEPTEMBER 1984
. -
DESIGN YOUR OWN!
system, then youth recreation programs that contribute
toward leisure literacy should also be offered free and CUSTOM MEDALS
fully subsidized. This analogy has two weaknesses. First, • NO DIE CHARGE!
whereas all children are required to participate in educa- ? • Your own Design, Size 8 Shape
• Up to 6 Hard Enamel Colors
tion offered by the schools, only a select group of children N T i • Gold, Silver or Bronze Finish
elect to participate in programs offered by the recreation Q °� — o • Your Choice of Ribbon Color
■
department. If only a select group of children receive • Carded in Polybags
pa Y g P - _ • Minimum Order 100
benefits, it is difficult to make the case that they should be • 8 weeks Delivery
fully tax - supported by other citizens. = ,'j, , f I ng or Track Medals
' available le for or Immediate Delivery.)
The inequity becomes even more pronounced if the
available
select group are from middle- or high- income families .' L i-1 SROPOLiT _ . Send Rough Sketch
rather than from low- income families, which is often the \ 1‘)'' qN it Your Phone No.
case in activities such as Little League, soccer, and soft-
ball. In this situation, poor people are being required to CUSTOM JEWELRY `
subsidize a program, usually through property or sales • NO DIE CHARGE! 4. ;'' 4`
taxes, even though their children do not benefit from it. •Charms, Pins, Keytags, \- ..___ C�
Tie Tacks, etc. I \
These taxes are regressive and hurt poor people most. • Max. Size, 1" in
4 The second weakness with the education analogy is any Shape CUSTOM
• Minimum Order EMBROIDERED • —+%
that schools already offer basic instruction in the recrea- 100 Pieces PATCHES
tion activities and the programs offered by the recreation • 8 Weeks Delivery
• Made from Your Rough
department are for more advanced practice of those skills Sketch • Choice of Colors 8 Shape. •
competitive opportunities. The only acceptable op- Write Today
and com
l� Ply Y Pt I} • Minimum -100 Pieces • 8 Weeks Delivery Your Letterhead...
tion is to charge all children who use any city facility an For Prices & Sample •
equitable price. Thus, children who play Little League,
soccer, and softball would pay a user fee that is consistent Write Direct, or Call Toil -free: 1 - 800/251 -2656 Dept. P. Box 2703 '
on some selected criteria to that charged children who GaGOLDNER 1819 Charlotte Ave.
ashville, TN 37219 i
use other facilities. ASSOCIATES, INC. Ph. (615)3 9-3007
There is one other common abuse of the requirement
to treat equals equally that occurs in a variety of contexts.
It is applicable of the "Robin Hood" principle. The Robin
Hood principle is implemented when an agency charges ■ ■ ® E t
users of one service a higher price than it costs to deliver ' l�
,:
this service and then uses the surplus income to subsidize
other users of that service or of other services. For exam- fl
ple, it may be possible to generate surplus revenues from i
golf facilities that may then be used to offset the deficits ; . •
associated with an aquatic facility. __
This strategy is inequitable. Equals are not being tre-
ated equitably. Why should golfers be singled out to sub-
sidize swimmers? If swimmers should be subsidized, then or
the full cost of the subsidy should be shared by the whole
community. It is unfair to select golfers to carry this com -
pensatory burden solely because they happen to be users
of a particular facility. ` .\1
Pricing is one of the most technically difficult and po- NOW A PART OF NASA'S
litically sensitive areas in which recreation and park
managers have to make decisions. Pricing decisions are ASTRONAUT TRAINING PROGRAM!
influenced by myriad ideological, political, economic, ONLY FIT -TRAIL OFFERS:
and professional arguments. However, the debate accom- • Signs guaranteed against vandalism.
panying this diversity of perspectives should be focused • Lumber guaranteed for 10 years.
upon sound principles. • Purchasing direct from the manufacturer.
In the past, when only nominal prices were charged, • 32 exercises at 20 stations, with heartbeat monitoring.
• Immediate shipping.
the underlying rationale of a price structure was not as • 8 year history of worldwide use.
likely to be challenged. As prices increase, traditional FOR THE VERY BEST, SPECIFY FIT TRAILS THE
structures need to be carefully examined to see if they are LEADER IN OUTDOOR EXERCISE COURSES.
fair and equitable. The three price discount structures ex-
plored in this article have long been accepted by many as SOUthWOOd
being a rate. However, when their rationale is in- / Post Office Box 240457 (704) 554 -8000
g ro pip P Charlotte, NC 28224 (800) 438 -6302 i
vestigated, it appears there are some instances in which
0 Under license from Recreational Development Corporation
inequities are being perpetuated.
See us at booths #308 & 309 in Orlando
/base circle reader sank* card number 32
PARKS & RECREATION /SEPTEMBER 1984 71