Chapter 8: Pricing of Gov Goods: User Charges

User charges

Prices charged by government for specific services or privileges

User charges vs taxes

User charges have a direct link between payment and benefit, taxes do not

Examples of user charges

Water bills, tuition, hospital fees, parking fees, tolls, transit fares, park fees

Purpose of user charges

Help pay for services and improve efficiency by reflecting demand

Direct charges

Fees for using a public service (ex. park entrance fee)

License fees

Payments for permission to do an activity (ex. driver’s license)

Special assessments

Property-based charges for specific improvements (ex. sidewalk fee)

User charges share of revenue (2018)

About 23.3% of state and local general revenue

Largest sources of user charges

Hospitals, education, sewers and sanitation

Trend in user charges

Have increased significantly since the 1960s and faster than other revenues

Income relationship

Lower-income states rely more on user charges

Reason for pricing

Prevents overconsumption by making users face true costs

When user charges are appropriate

When benefits go to users, users can be identified, and demand is elastic

Capital (access) costs

Costs of building or providing a facility, paid by all beneficiaries

Operating (use) costs

Costs of using a service, should equal marginal cost

Examples of capital costs

Fixed water service fee, property assessments

Examples of operating costs

Per gallon water fee, tuition per class, park entry fee

Congestion costs

Costs imposed on others when a service is crowded

Congestion pricing

Charging higher fees during peak use to reduce crowding

User charge components

Access charge, use fee, congestion charge

Natural monopoly

Industry with high fixed costs and low marginal costs (ex. utilities)

Problem with natural monopoly pricing

MC pricing causes losses, average cost pricing is inefficient

Two-part pricing

Fixed fee plus per-unit usage price

Examples of two-part pricing

Monthly water fee plus per gallon charge, transit pass

Advantages of user charges

Efficient allocation, fairness, nonresidents pay, reveals demand

Equity concern

User charges can burden low-income individuals

Administrative costs

Costs of measuring use, billing, and collecting fees

Tennis court example

Waiting time acts as a price when no fee is charged

Efficient pricing (fixed supply)

Charge only during high demand, free when excess capacity

Parking meter logic

Fees reduce congestion and allocate spaces efficiently

Public higher education tuition share

Covers about 30–50% of costs

Argument for higher tuition

Benefits are mostly private and users can be charged

Why not full tuition funding

Education has social benefits and externalities

External benefits of education

Society benefits from an educated population

Two-part pricing in education

Fixed tuition plus low per-credit cost

Equity solution for tuition

Targeted financial aid instead of low tuition for all

K–12 user charges

Very small (~4% of funding), mostly lunches and activity fees

Why K–12 fees are limited

Equity concerns, legal limits, political factors

Water pricing components

Connection fee, fixed charge, per-unit usage fee

Water pricing strategies

Increasing block pricing, seasonal pricing, drought pricing

Refuse collection pricing

Based on bags, weight, or container size

Government trash bags

Special bags that include disposal cost

Incentives from trash fees

Encourage recycling but may cause illegal dumping

Parks and recreation fees

Used but sometimes limited by fairness concerns

Reason people resist park fees

Believe they already paid through taxes

Creative user fees

Ambulance fees, false alarm fees, fire protection subscriptions

International example (Australia)

Uses two-part pricing and tradable water rights