Highways: Cost and Regulation in Europe Universita degli Studi Bergamo November 2004 Road Pricing Rules and Distribution Effects Andreas Kopp Joint OECD/ECMT Transport Research Centre

Motivation and Overview Perception of distributional effects is major political acceptance problem Clarification trade-off between efficiency and distributional norms Governments role to achieve desirable distributional outcomes Distributional norm

Distribution effects and acceptability Mere misperception: “unfair” to price something that is free or has been paid for in the past Implementation mistakes: pricing read as tax increase Perception of particular burden for low income groups

Optimal Pricing and Scope for Distributional Conflict Highway pricing as a quasi-market –with strong congestion: infrastructure is self- financing with marginal cost pricing despite indivisibilities: high fixed costs constant marginal cost of infrastructure due to convexificaton of cost function by congestion costs

Optimal Pricing and Scope for Distributional Conflict C C road use 

Optimal Pricing and Scope for Distributional Conflict AA MM p A Price demand relation A  new

Optimal Pricing and Scope for Distributional Conflict

Quasi-market works against misperception of pricing being a tax implies absence of surpluses previous tax resources for infrastructure are returned, used to change secondary income distribution But: will hold not for all facilities as congestion is not strong enough

Optimal Pricing and Scope for Distributional Conflict with little or no congestion –social marginal cost pricing still optimal –any other price will lead to underutilization  public transfer or fixed fee (two part tariff) required

Optimal Pricing and Scope for Distributional Conflict AC P(x) AC

Optimal Pricing and Scope for Distributional Conflict fixed fees imply distributional problem E(p f, p c,u*) E(p*, p c,u*)

Optimal Pricing and Scope for Distributional Conflict Non-linear price schedule –not likely to increase acceptability: highest income earner has lowest price –consumers make systematic mistakes with non- linear price schedules (telecom, gym)

Necessity for Regulation? private firm motives for n-l schedules: turns more consumer rents into profits Consumers’ mistakes will be used strategically More generally, without direct competition providers will attempt to perfectly price discriminate

Necessity for Regulation? even if less regressive than head tax –high costs for infrastructure use –reflecting high monopoly rents –lower absolute welfare levels for all users

Regulatory Scheme marginal cost pricing fixed cost allocation scheme according to Shapley value –all possible sequences of user coalition formation considered –increases in net coalition values are split equally, averaged over all sequences –“fair” in the sense that no user would want to adopt the role of a fellow user –expected outcome of bargaining process, maximising the joint surplus