Seniors gold card
Posted August 30, 2007on:
Winston Peters has come to the rescue of the elderly by delivering a gold card. Now blah blah people are complaining that the discounts are not enough and blah blah people are annoyed they don’t get discounts on power. I don’t really care about that. What excites me the idea of why firms may be willing to get involved in this scheme.
Now there could be reputation effects, advertising etc etc. However, there is an even simpler solution, price discrimination. Generally, the elderly have more elastic demand for many goods, as they are on lower incomes then people that are in their prime working age. As a result, firms want to charge a lower price to the elderly, than they do to people who are still working full time. That is why there are all sorts of discounts schemes for elderly people already.
However, there is a cost to setting up these scheme, which may be sufficient to stop firms doing it. Suddenly the government offers to pay to set it up, and firms can price discriminate to their hearts desire. That seems cool, the elderly and the firms are better off, have we got a free lunch here? No.
Someone has to pay for this, and that is working people. They pay taxes, which get used to fund the scheme. Also as the firms can price discriminate, they will now charge a higher price to those with relatively inelastic demand, the people working.
As an intertemporal transfer, this seems ok, except for the fact that the current elderly never had to pay the higher prices and taxes associated with this scheme. As a result, they are getting a free transfer, and the generation that turns elderly once the scheme is scrapped is the generation that will have to pay for it. Still I don’t really care, I just like talking about price discrimination 😉
Hat tip: No minister