City & Business: Sticky question

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The Independent Online
So John Major wants to flog off the organisation that even Baroness Thatcher dared not privatise. The Royal Mail is probably heading for the stock market. Mr Major has been careful to stress that three elements will be preserved: the Queen's head will remain on the stamps; the post office chain will continue in the state sector; and the uniform tariff will stay firmly in place.

This last promise is such a sacred cow, you can almost hear it mooing. Ever since Rowland Hill introduced the penny post in 1840, it has cost the same to send a letter anywhere in Britain, regardless of its source or destination. Before then, the price depended on distance and it was the recipient, not the sender, who had to cough up.

Uniform pricing was supported by radicals such as Richard Cobden, who argued that the old system was so expensive that it prevented working-class people from receiving letters from children and relatives working away from home. In fact, when the penny post was introduced it was the middle classes and above all businessmen who scrambled to use the cheap service.

The idea of uniform pricing as an instrument of progressive redistribution is highly suspect. If anything, there is a cross-subsidy from the poor in densely populated cities to the comparatively well off in the countryside. The cost per letter of delivering to an inner-city tower block is a fraction of the expense of a delivery round in the sparsely populated countryside. Calculating the precise comparative costs is nigh on impossible. But Post Office officials privately concede that delivering between two remote villages is about 25 times the cost per letter of the same service between two big cities.

While the Government is embracing uniform pricing at the Post Office, the practice is crumbling elsewhere. A single national price is almost impossible to preserve once competition is introduced into an industry. Rivals cherry-pick the regions that are cheapest to serve, leaving the most expensive markets.

It looks increasingly likely that British Gas will have to introduce a lower tariff for consumers in the eastern parts of the country, where gas is piped ashore from nearby North Sea fields, and a correspondingly higher tariff in the distant west. Once competition is injected into the industry, it will have little choice. British Telecom has now begun to talk openly about differential pricing. Michael Hepher, the managing director, signalled last week that BT was looking at the option of charging different prices in different regions. Pay-where-you-live billing could be a reality within a couple of years, though BT would require permission from its regulator, Oftel.

Any economist will tell you that differential pricing is a good thing. Prices should reflect local costs if resources are to be allocated efficiently. Any backbencher in a rural constituency will tell you this is electoral suicide. But my money's on the economists.

Who knows, in 20 years it may be mail recipients, not senders, who foot the bill, as they did before 1840 - those with the longest driveways clobbered accordingly.