Cost of living differences between urban and rural areas in Indonesia

It is commonly assumed that the cost of living is much higher in cities than in the country because housing rents are higher in urban areas and food staples cost more. This assumption has important implications for sectoral comparisons of welfare levels and distributions. The authors suspect that comparisons of housing rent and food prices overstate the cost-of-living differential. For one thing, the quality of dwelling stock is better on the whole in urban areas, reflecting income differences. For another, the urban consumer is able to substitute in favor of other goods and services which do not cost any more in urban areas. This paper finds that the true cost of living in cities is substantially overestimated by conventional methods. This is more pronounced at low incomes, since the marginal cost of utility is larger (relative to expenditures) in urban areas - implying that the relative cost of urban living increases with income. In a neighborhood on the poverty line, the results suggest that an urban-rural cost-of-living difference of about 10 percent is closer to the truth than the values (as high as 66 percent) used in past work on Indonesia.