Complementing Scott: Justifying Discounts for Low-Income Groups through an Economic Lens

EXECUTIVE SUMMARY: In a recent article in this journal, Scott (2014) documented the social welfare rationale for offering discounts to the economically disadvantaged. However, he acknowledged the conventional view is that discounts equate to reduced revenue and more tax support which makes them difficult to sustain in many communities. The goal of this paper is to offer an alternative justification for discounts, which suggests that rather than lowering revenues, discounts are a vehicle for increasing revenues. The paper begins by explaining the concept of price elasticity in non-technical terms, its limitations, and the factors that influence it, since this is the principle upon which the economic justification is based. Two methods managers can use to estimate elasticity are described and illustrated: Review of the historical record and willingness-to-pay. The elasticity principle is operationalized by park and recreation managers through the use of differential pricing by which different users are charged a different price for the same service based on their different price elasticities. This means that discounts can generate net revenue for agencies they would otherwise forego. If there are no capacity constraints then, as long as a discounted price exceeds the variable costs, revenue accruing from those who are responsive to the discount price who would not participate at the regular price, is net gain. The paper concludes by describing the three conditions that must exist if discounts are to be effectively implemented: (i) They must not arouse antipathy and resentment from those paying the regular price; (ii) there should be no opportunity to engage in arbitrage; and (iii) there is horizontal equity, meaning that all low income users should pay the same price for the same service at the same time and location.