Rational
spending rule, despite the abstract derivation, can be used to make sense of
several real world phenomenon.
Some cities have grown
vertically while the rest have grown horizontally. To use popular analogy, it
can be described as the lift vs the car model. The answers can be sought in
utility analysis. Cities which are short of space find it difficult to accommodate
people close to the city center. The cost of land being high deter people and
either move them to the margins or compel to look at alternatives. Similar is
the case with commercial space in land starved locations. An analysis would
probably reveal a greater spending on alternative goods than housing. It need not necessarily be for upper income
groups alone.
Experts have often
wondered on the increased consumption of consumer electronics or durable goods
in poorer localities. Dharavi in Mumbai may not have enough space to provide
basic housing and sanitation, but residents possess televisions, mobile
handsets and two-wheelers. The high costs of land put them off from building a
house or purchasing an apartment and instead focus on acquisition and usage of
durable and fashion accessories. Further no legal or formal land titles, they
may not choose to invest on sanitation, clean running water and better housing.
Substitution effect, people tend to move to cheaper goods when a price of a
good goes up, can be used to explain these.
In certain cities, while
the alternative to owning a house is renting a house, the desire to own a house
at minimum expenditure makes individuals look for flats as an alternative. In
some cities in California, the pull effect, despite market implosion for
housing, has led to condos/townhomes almost selling twice the number of houses.
In London, there was a
plan to reduce plastic bottles (plastic bottles increase litter causing
environmental degradation). The alternatives suggested were to increase the
number of fountains while allowing consumers to bring their own bottled water.
An analysis of consumer preferences would make an interesting reading.
Consumers may now drink from fountains (Excercising their less preferred choice
than before while earning lower revenue (tax on bottled water) and increased
costs (costs of setting and maintain the fountain); switching to juice and soft
drinks ( no impact on reduction in plastic litter while in a drop in consumer
utility); switch to no use of water ( lowers consumer utility on account of
possible exhaustion/dehydration by lack of access to water). In other words, a
policy design needs to examine the utility of the consumers.
Subsidies in US cities
for sports stadiums have come in for criticism on the grounds of substitution
effect. Subsidy proponents argue the employment opportunity and impact on real
estate market as key reasons for continuing the subsidies. An analysis using
substitution models reveal that the spending on sports is essentially a
movement from expenditure on alternative goods. A family which now goes for
watching sports in the stadium would sacrifice its earlier choices of
entertainment at a theatre, movie house, pantomime etc. Therefore the income
would remain same only a movement on the budget line to new consumer
equilibrium.
Often we find heavy
queues in front of the PDS stores. Most of them would be from lower income
groups. Generally, similar long queues are not found in high end markets. This
could be attributed to the willingness of higher income groups to pay more to
avoid standing in queues than the poorer sections of the society. Yet one does
see long queues in some leading retail outlets’ billing counters. Any
suggestions to avoid queues??
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