Question

User fees for public services are highly regressive, especially when the elasticity of demand for the service is low. Explain.

Answer 1

The Elasticity of demand refers to the degree of responsiveness in the quantity demanded due to change in the level of prices, keeping other factors constant. Low elasticity of /inelastic demand implies a situation where the customer would not change the quantity demanded in case of a price rise. Such a situation is witnessed in the case of necessity goods like water, where a rise in the prices would have a minor or negligible impact on the quantity demanded.
Public services like healthcare or water supply fit correct in the bracket of inelastic demand commodities. Moreover, utility services are also highly regressive as the same price is being charged for the service irrespective of annual income. For instance, kidney transplant costs around $400,000 irrespective the acquirer are rich or poor. This further widens the level of inequality present in the economy.
Ideally, the rich should be charged more for public utility services. The higher charge from the rich could be used to cross-subsidize the lower fee charged from the poor. This would help to attain equality in the distribution of services.