User fees and charges

User Charges Disadvantages

Applicability limited- Few of the goods/services provided by gov't qualify for user charge financing Ex watching a house burn May distort decision making Regressive? Makes no sense to tax services targeted at low income families Political cost--Already paid tax, why pay user charge Enforcement can be painful

Guidelines, how to price a user charge.

Determine and separate fixed and variable costs Charge should be based on variable costs Often start at cost plus mark-up with adjustments as demand and cost information are collected Charge should be use sensitive; especially if objective is resource allocation Track usage and charge based on usage (per gallon of water used instead of a flat charge per month) this important for behavior-- Monopoly

Lotteries

Not a significant source of revenue Less then 5% of revenue in most States Expensive to produce Administrative, security, advertising commission to vendors Unstable source of revenue Very responsive to personal income Regressive

Advantages of user chargers

Provides a good way to measure public demand for the good/service Equity Efficiency User charges forces the agency to provide what consumers want Correct price signals in the private market

When do User chargers apply?

The beneficiaries of good/services can be identified at the individual level Compare police services with the city's recreation facility Non-payers can be prevented from consuming the good/service. No free riders; i.e., the good must be excludable Charges are particularly important as a means of controlling over consumption (recreation facility, water financed by taxes)

What is a User Charge?

A user charge is a charge for the use of a product or service. A user charge may apply per use of the good or service or for the use of the good or service. The first is a charge for each time while the second is a charge for bulk or time-limited use.

What is a User Fee?

A user fee is a fee, tax, or impost payment paid to a facility owner or operator by a facility user as a necessary condition for using the facility. Example: Licenses

user fees

Used to regulate specific activities Driving- Driving: user charge (toll) Usually flat rate (but graduated by type of activity) Passports- traveling

License for Revenue

Usually given to all who apply, no inspections; marriage licenses?

Licenses for Regulation

Very restrictive, involves regular inspections; eg, license to sell alcohol (franchise fee- court system enforces)

Monopolies are efficient when--

production exhibits increasing returns to scale Make sense to have one firm in this case; but does not imply government ownership Private with taxation/regulation may be more appropriate

Ownership of monopolies

varies across states; they are owned for various reasons To reap benefits from profit; used to subsidize other operations To keep prices low In this case the utility may have to be subsidized by general tax revenue To regulate (Utilities, mass transit, alcohol, lottery etc)