The “poverty premium” is the higher cost paid by the poor compared to more affluent residents. This cost can be both quantitative (literally paying more for the same good) and qualitative (incurring costs by consuming a poor-quality product). Several factors contribute to this poverty premium, including lack of options and limited supply pushing prices up. This article will discuss the strange economics of being poor, and why, in some cases, being poor costs more.

Bulk Buying

Bulk buying involves purchasing large quantities of goods, reducing the individual cost of each item. However, it requires a larger amount of cash upfront. Those without enough cash to buy in bulk spend more on individual goods. In Malawi, poorer households cannot take advantage of bulk discounts for maize, the main staple food. Regardless of location, households could enjoy bulk discounts, but rural households are less likely to buy bulk maize compared to urban residents. This creates a cycle where poor Malawians pay more for maize, leaving less cash for bulk discounts, thus perpetuating poverty.

Similarly, in Tanzania, poorer households lack access to bulk-buying discounts, affecting various food items. The Tanzanian study found significant bulk-buying discounts across 20 food items, from tomatoes to rice. Reasons for these differences include reduced packaging costs and sellers wanting to sell perishable goods quickly. Tanzanian researchers found poorer households could not consistently use these discounts due to limited cash, despite purchasing larger quantities at times. This creates a Catch-22, where households cannot afford cheaper options, forcing them to spend more.

Water

The poverty premium is evident in water costs, with poor families in urban slums paying up to 10-20 times more for water compared to richer neighbors with piped connections. This issue relates to infrastructure, with about three in 10 people lacking safely managed drinking water services worldwide as of 2019.

A 2019 report described households in underserved Indian neighborhoods relying on water trucks and kiosks rather than household taps. In these cases, buying water from vendors could cost substantially more than receiving it through a subsidized connection; some families reportedly spent up to 30% of their income on water. Sangam Vihar, a southern neighborhood in Delhi, India, is an “unauthorized” area, limiting access to metered connections and subsidies. Residents rely on private contractors for water, costing 300-500 rupees per month in 2009, while those in affluent areas with metered connections pay around 100 rupees per month. This shows the poverty premium extends beyond bulk buying and food, affecting basic infrastructure like water.

Mobile Data

The poverty premium also affects mobile data in South Africa, where poorer rural households pay more compared to wealthier individuals. South Africa already has high mobile data prices, and poorer households face price discrimination by buying data in small quantities. The Competition Commission found competition in the data market is often restricted. Those better connected access more competitive markets, which is reduced for rural residents. Buying in small quantities is more expensive, and poorer South Africans pay more than those on data plans.

This is concerning as 30% of South Africans are on the low-income line and 20% on the poverty line. Limited connectivity restricts access to economic opportunities, and the poverty premium for mobile data can be up to 11 times higher for those unable to buy large data bundles. A survey in South Africa showed mobile phones are vital to people’s lives, illustrating the poverty premium’s impact on digital connectivity and modern infrastructure.

Looking Forward – Initiatives

Despite the widespread nature of the poverty premium, some initiatives aim to counteract its effects. In Malawi, Richard Mussa recommended government policy interventions like consumption loans and group-buying schemes. In India, a 2006 report found that insecure tenancy in slums prevents residents from investing in community-led projects to address water issues. A solution likely requires ensuring security and cooperation between private and communal spheres. In South Africa, advocacy against rising mobile data prices has been significant. Since 2016, the “#DataMustFall” campaign has gained popularity, alongside Competition Commission hearings and a data-services market inquiry from 2017-2019. Advocacy remains a strong way to promote a cause.

These initiatives, from Malawi’s group-buying schemes to grassroots advocacy in South Africa, illustrate responses to the poverty premium, from proposals to improve affordability to real-world advocacy.

The Strange Economics of Being Poor

The term “strange” refers to the counterintuitive nature of the economics of poverty, and the poverty premium falls under this category. This article has only touched on the strange economics of being poor, affecting areas like energy, education, healthcare and savings. The initiatives discussed are just a few among many that combat poverty and the premium. Poverty is not always straightforward: lacking money or infrastructure to access lower prices can make essential goods and services more expensive for the poor.

– Sebastiano Brussato

Sebastiano is based in London, United Kingdom and focuses on Politics for The Borgen Project.

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