Cross subsidization definition

What is Cross Subsidization?

Cross subsidization is the practice of funding one product with the profits generated by a different product. This means that one group of customers is paying for the consumption of other customers. This situation arises when the public transit fares in densely populated areas are set somewhat higher in order to pay for artificially low transit fares in less-populated areas where the government is trying to encourage the use of public transit.

Example of Cross Subsidization

Jeff, George, and Harry order meals that cost $20, $25, and $30, respectively, and are then charged $75 for the three meals on a single bill. If each one of them pays $25, Jeff is cross subsidizing Harry for $5, since Jeff is paying $25 for a meal that cost $20, while Harry is paying $25 for a meal that cost $30.