User Fees, User Charges and Sales

1. PA 546 Constantine Hadjilambrinos User Fees, User Charges and Sales Lecture 9 November 1, 2005

2. PA 546 Constantine Hadjilambrinos • User fees—government sales of licenses to engage in otherwise restricted or forbidden activities. • User charges—charges for voluntarily purchased publicly provided services. • Sales—revenues from sale of goods and services provided by government (government monopolies, government-controlled toll goods, etc).

3. PA 546 Constantine Hadjilambrinos • Fees, charges and revenues from sales of goods and services are a popular way to raise revenue because they do not increase the tax burden. • Revenue garnered directly from users of government services—meets equity criteria. • Revenue signals level of demand—can enhance efficiency of government provision of goods and services.

4. PA 546 Constantine Hadjilambrinos • May induce government to impose fees that make use of services impossible for low income citizens. • May induce government to provide revenue-producing goods and services to the detriment of other government services. • Government may be less efficient than the private sector in providing revenue-generating goods and services.

5. PA 546 Constantine Hadjilambrinos User Fees and Licenses • Fees must be paid by whomever wants to engage in activity that requires a permit/license. • Fees do not purchase any government services. • Vehicle registration fees, drivers’ licenses—necessary for vehicle operation but do not purchase any services. • Business license fees—different than franchises

6. PA 546 Constantine Hadjilambrinos User Charges Charges paid for delivery of a good or service to a relatively small number of individuals or businesses. Conditions:Benefit separability (identify who gets what) Benefit chargeability (ability to “meter”) Benefits should be “private” rather than “public” (education?) Particularly appropriate when substantial waste would result from under-pricing.

7. PA 546 Constantine Hadjilambrinos Advantages: • Charge offers test of demand for goods and services—government can respond. • Charge offsets the cost of delivery of goods and services. • Charge allocates the cost of delivery equitably. • Charge may correct cost-price signals in private market.

8. PA 546 Constantine Hadjilambrinos Disadvantages: • True public goods do not lend themselves to user charges. • Re-distribution objectives may be thwarted. • Charge may be too expensive to collect. • There may be political opposition.

9. PA 546 Constantine Hadjilambrinos Setting prices for user charges is often difficult—trial and error. • If similar privately provided goods/services, government can set price on basis of price of market • Cost markup by a certain percentage. • If possible, prices should be set on a “unit” basis—cost should reflect quantity used.

10. PA 546 Constantine Hadjilambrinos Revenue from Public Enterprises (Public Monopolies) • Utilities (water, sewer, garbage, electricity/gas, transport) • Liquor stores • Lotteries, gambling enterprises (voluntary revenue, but highly regressive)