Beyond Cost Recovery: Setting User Charges for Financial, Economic, and Social Goals

Abstract

This paper describes a way of setting user charges to pursue many, possibly conflicting goals. It has three requirements: (i) explicit and specific goals; (ii) for each goal, a pricing rule that includes only the necessary constraints; and (iii) a general and flexible structure of charges, to make room for as many pricing rules as possible. The latter will reduce conflicts among pricing rules, but reconciling any remaining conflicts requires compromises among the goals. The paper covers several common goals of user charges: good governance, financial sustainability, distributive justice, economic efficiency, and fair pricing. It shows that they can be pursued jointly, with little compromise or sacrifice, by following three steps: (i) set usage charges for distributive justice and economic efficiency; (ii) if additional revenue is required for financial sustainability, set fixed charges for sustainability and fairness; and (iii) increase or adjust charges at a rate consistent with good governance. The resulting user charge depends on circumstances, but is always simple and familiar. The approach suits whatever goals the public chooses for setting user charges, and is not particular to the five considered in this paper.