1. Task 1.4: Mark-up Rules Saskia van der Loo K.U.Leuven Funding meeting, Leuven, 8-9 dec 2005

2. Internal mark-ups (users pay more) External financing from rest of transport sector Mark-up rules for funding investments Mark-up rules | Internal mark-ups | One & Two mode approach | External mark-ups Deficit with msc pricing Efficiency cost of higher user prices (internal mark-up) Efficiency cost of external financing External Internal

3. Research question: what is feasibility and economic efficiency cost of decreasing the financial deficit of the project? Methodology: a)One mode approach: consider only the project and assuming other modes are priced correctly b)Two mode approach: consider spillover effects on other mode that is incorrectly priced Mark-up rules | Internal mark-ups | One & Two mode approach | External mark-ups Internal mark-ups

4. 1.What is the cost recovery with marginal cost pricing? 2.What is the efficiency cost of mark-ups? One mode approach Mark-up rules | Internal mark-ups | One & Two mode approach | External mark-ups

5. Cost-recovery results: (Revenue Chapter 2, A. de Palma & R Lindsey) Theorem: Assume the user cost function is homogeneous of degree 0, and capacity is perfectly divisble. Then with marginal-cost pricing the cost-recovery ratio is = elasticity of capacity cost function The cost recovery question Mark-up rules | Internal mark-ups | One & Two mode approach | External mark-ups

6. D Marginal Capacity cost Pass trips/day Euro/trip User cost Capacity toll* Illustration Mark-up rules | Internal mark-ups | One & Two mode approach | External mark-ups Toll revenues = capacity cost Deficit Deficit decrease Welfare loss

7. Model: User cost Capacity cost: Demand: Mark-up is set at a fraction f of the 1st best optimal toll conditional on usage Functional Forms Mark-up rules | Internal mark-ups | One & Two mode approach | External mark-ups

8. Welfare: Functional Forms Mark-up rules | Internal mark-ups | One & Two mode approach | External mark-ups

9. Cost-recovery for non-optimal pricing and second best capacity : s = elasticity of users costs with respect to the volume/capacity ratio, β = price elasticity of demand, ε = elast capacity cost f = toll / first-best toll Limits : Cost recovery ratio Mark-up rules | Internal mark-ups | One & Two mode approach | External mark-ups

10. Maximum cost-recovery ratio for given elasticities: s = elasticity of users costs with respect to the volume/capacity ratio, β = price elasticity of demand, ε = elast capacity cost f = toll / first-best toll Mark-up rules | Internal mark-ups | One & Two mode approach | External mark-ups Example: β=2, s=4 then typically ε = 0.3 → maximum cost-recovery: ρ=0.45 Cost recovery ratio

11. toll0,0440,0500,0550,0610,0660,0720,0780,083 0,089 quantity1009487,781,77670,86661,757,8 capacity10099,698,797,395,693,99290,288,4 cost recovery0,3000,3170,3300,3400,3470,3520,3550,3580,360 ΔΩ/z###-0,162-0,329-0,491-0,646-0,789-0,925-1,048-1,163 sβε 40.90.3 s = elasticity of users costs with respect to the volume/capacity ratio, β = price elasticity of demand, ε =elast capacity cost Numerical Example z = decrease in deficit Mark-up rules | Internal mark-ups | One & Two mode approach | External mark-ups 1.163 euro loss for 1 euro less deficit

12. Spillover effects on another mode: Assume: second mode is underpriced Mark-up on mode 1 → Users will shift to underpriced mode → extra welfare loss Two mode approach Mark-up rules | Internal mark-ups | One & Two mode approach | External mark-ups

13. MRC 2 C2C2 MSC 2 P ΔN2ΔN2 msc 2 -p 2 P’ Spillover effects on underpriced mode Mark-up rules | Internal mark-ups | One & Two mode approach | External mark-ups

14. toll (1) 0,0440,0500,0550,0610,0660,0720,0780,0830,089 quantity (1) 1009487,781,77670,86661,757,8 capacity (1) 10099,698,697,395,693,99290,288,4 cost recovery 0,3000,3170,3300,3400,3470,3520,3550,3580,360 Δq 1 /Δq 2 ###32,82,62,42,32,121,9 ΔΩ 1 /z ###-0,162-0,329-0,491-0,646-0,789-0,925-1,048-1,163 ΔΩ 2 /z ###-0,114-0,135-0,157-0,179-0,202-0,226-0,249-0,273 ΔΩ 1 /z + ΔΩ 2 /z ###-0,276-0,464-0,647-0,825-0,992-1,151-1,297-1,436 ε 12 cross-price elasticity z = decrease in deficit sβε ε 12 p 2 - ms c 2 40.90.30.07-0.015 Numerical Example Mark-up rules | Internal mark-ups | One & Two mode approach | External mark-ups

15. Previous approach was based on one price for all trips and only one type of user In practice one can –discriminate between users and increase the cost coverage –Charge a non linear tariff (degressive, two part tariffs etc.) and transfer more consumer surplus into revenues In the limit one can of course extract all consumer surplus but we are still looking for realistic estimates on cost coverage increase and associated efficiency loss → Still looking for information Mark-up rules | Internal mark-ups | One & Two mode approach | External mark-ups Non-linear pricing

16. External mark ups = extra taxes on other transport sectors that can via transport funds be used to finance TEN’s Two types of charges: –Extra gasoline and diesel tax –Road tolls –Air traffic charges… Efficiency costs will depend on the difference between user prices and marginal social costs or between current taxes and marginal external costs Mark-up rules | Internal mark-ups | One & Two mode approach | External mark-ups External mark-ups

17. Advantages: –Easy to handle –Net additional revenues possible if increases in a balanced way for both products Although long term price elasticity may be approaching -1 Disadvantages –Efficiency is poor because gasoline and diesel taxes are a very poor proxy for external costs Not related to congestion (may even generate negative rebound effect in the sense that more fuel efficient cars may be used more rather than less) Directly related to CO2 emissions but these are already overtaxed Not well related to other air pollutants and to accident risks Mark-up rules | Internal mark-ups | One & Two mode approach | External mark-ups Gasoline and Diesel taxes

18. Feasibility: –Short term: only Germany and France –Longer term (2010 or so ?) Advantages –Can be better targeted to congestion Disadvantages –Still hypothetical Mark-up rules | Internal mark-ups | One & Two mode approach | External mark-ups Tolls