User pays, or beneficiary pays, is a pricing approach based on the idea that the most efficient allocation (and consumption) of resources occurs when consumers pay the full cost of the goods that they consume. In public finance it stands in opposition to another principle of "ability-to-pay," which states that those who have the means should share more of the burden of public services. The ability-to-pay principle is one of the reasons for the general acceptance of the progressive income tax system.
The principle of user pays supports the idea of horizontal equity, which states that those in similar wealth and income positions should be treated equally by the tax system. The basic idea is that those who do not use a service should not be obligated to pay for it. As long as the beneficiary aligns exactly with the user, the user-pays principle works. Those who do not go to a movie are not obligated to pay for someone else to attend.
In public goods, beneficiaries and users sometimes do not align. The divergence of user and beneficiary occurs when production and consumption have external effects. Driver who purchase gasoline may believe that they pay for the full cost (user-pays) of using gasoline except for the greenhouse gases produced. They impose costs on the environment and are known to contribute to climate change. The "beneficiaries" must bear costs not paid in the purchase of gasoline. In that case the user-pays principle results in the driver not paying the full or social cost of using fossil fuels, which creates a strong argument for regulation and other forms of public intervention. Increasing taxes on gasoline is one possible response that preserves the user-pays principle by increasing the costs to user.
However, such analysis is often complicated by the lack of knowledge that would inform regulators of the efficient level of gas use and the costs of emissions.
Related Research Articles
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer by a governmental organization in order to collectively fund government spending, public expenditures, or as a way to regulate and reduce negative externalities. Tax compliance refers to policy actions and individual behaviour aimed at ensuring that taxpayers are paying the right amount of tax at the right time and securing the correct tax allowances and tax relief. The first known taxation took place in Ancient Egypt around 3000–2800 BC. Taxes consist of direct or indirect taxes and may be paid in money or as its labor equivalent.
Transport economics is a branch of economics founded in 1959 by American economist John R. Meyer that deals with the allocation of resources within the transport sector. It has strong links to civil engineering. Transport economics differs from some other branches of economics in that the assumption of a spaceless, instantaneous economy does not hold. People and goods flow over networks at certain speeds. Demands peak. Advance ticket purchase is often induced by lower fares. The networks themselves may or may not be competitive. A single trip may require the bundling of services provided by several firms, agencies and modes.
In economics, an externality or external cost is an indirect cost or benefit to an uninvolved third party that arises as an effect of another party's activity. Externalities can be considered as unpriced components that are involved in either consumer or producer market transactions. Air pollution from motor vehicles is one example. The cost of air pollution to society is not paid by either the producers or users of motorized transport to the rest of society. Water pollution from mills and factories is another example. All (water) consumers are made worse off by pollution but are not compensated by the market for this damage. A positive externality is when an individual's consumption in a market increases the well-being of others, but the individual does not charge the third party for the benefit. The third party is essentially getting a free product. An example of this might be the apartment above a bakery receiving some free heat in winter. The people who live in the apartment do not compensate the bakery for this benefit.
In economics, a public good is a good that is both non-excludable and non-rivalrous. Use by one person neither prevents access by other people, nor does it reduce availability to others. Therefore, the good can be used simultaneously by more than one person. This is in contrast to a common good, such as wild fish stocks in the ocean, which is non-excludable but rivalrous to a certain degree. If too many fish were harvested, the stocks would deplete, limiting the access of fish for others. A public good must be valuable to more than one user, otherwise, its simultaneous availability to more than one person would be economically irrelevant.
An environmental tax, ecotax, or green tax is a tax levied on activities which are considered to be harmful to the environment and is intended to promote environmentally friendly activities via economic incentives. One notable example is a carbon tax. Such a policy can complement or avert the need for regulatory approaches. Often, an ecotax policy proposal may attempt to maintain overall tax revenue by proportionately reducing other taxes ; such proposals are known as a green tax shift towards ecological taxation. Ecotaxes address the failure of free markets to consider environmental impacts.
Public finance is the study of the role of the government in the economy. It is the branch of economics that assesses the government revenue and government expenditure of the public authorities and the adjustment of one or the other to achieve desirable effects and avoid undesirable ones. The purview of public finance is considered to be threefold, consisting of governmental effects on:
The efficient allocation of available resources;
The distribution of income among citizens; and
The stability of the economy.
A fuel tax is an excise tax imposed on the sale of fuel. In most countries the fuel tax is imposed on fuels which are intended for transportation. Fuel tax receipts are often dedicated or hypothecated to transportation projects, in which case the fuel tax can be considered a user fee. In other countries, the fuel tax is a source of general revenue. Sometimes, a fuel tax is used as an ecotax, to promote ecological sustainability. Fuel taxes are often considered by government agencies such as the Internal Revenue Service as regressive taxes.
A Pigouvian tax is a tax on any market activity that generates negative externalities. A Pigouvian tax is a method that tries to internalize negative externalities to achieve the Nash equilibrium and optimal Pareto efficiency. The tax is normally set by the government to correct an undesirable or inefficient market outcome and does so by being set equal to the external marginal cost of the negative externalities. In the presence of negative externalities, social cost includes private cost and external cost caused by negative externalities. This means the social cost of a market activity is not covered by the private cost of the activity. In such a case, the market outcome is not efficient and may lead to over-consumption of the product. Often-cited examples of negative externalities are environmental pollution and increased public healthcare costs associated with tobacco and sugary drink consumption.
Feebate is a portmanteau of "fee" and "rebate". A feebate program is a self-financing system of fees and rebates that are used to shift the costs of externalities produced by the private expropriation, fraudulent abstraction, or outright destruction of public goods onto those market actors responsible. Originally coined in the 1970s by Arthur H. Rosenfeld, feebate programs have typically been used to shift buying habits in the transportation and energy sectors.
An indirect tax is a tax that is levied upon goods and services before they reach the customer who ultimately pays the indirect tax as a part of market price of the good or service purchased. Alternatively, if the entity who pays taxes to the tax collecting authority does not suffer a corresponding reduction in income, i.e., the effect and tax incidence are not on the same entity meaning that tax can be shifted or passed on, then the tax is indirect.
Tax policy refers to the guidelines and principles established by a government for the imposition and collection of taxes. It encompasses both microeconomic and macroeconomic aspects, with the former focusing on issues of fairness and efficiency in tax collection, and the latter focusing on the overall quantity of taxes to be collected and its impact on economic activity. The tax framework of a country is considered a crucial instrument for influencing the country's economy.
Optimal tax theory or the theory of optimal taxation is the study of designing and implementing a tax that maximises a social welfare function subject to economic constraints. The social welfare function used is typically a function of individuals' utilities, most commonly some form of utilitarian function, so the tax system is chosen to maximise the aggregate of individual utilities. Tax revenue is required to fund the provision of public goods and other government services, as well as for redistribution from rich to poor individuals. However, most taxes distort individual behavior, because the activity that is taxed becomes relatively less desirable; for instance, taxes on labour income reduce the incentive to work. The optimization problem involves minimizing the distortions caused by taxation, while achieving desired levels of redistribution and revenue. Some taxes are thought to be less distorting, such as lump-sum taxes and Pigouvian taxes, where the market consumption of a good is inefficient, and a tax brings consumption closer to the efficient level.
An excise, or excise tax, is any duty on manufactured goods that is normally levied at the moment of manufacture for internal consumption rather than at sale. It is therefore a fee that must be paid in order to consume certain products. Excises are often associated with customs duties, which are levied on pre-existing goods when they cross a designated border in a specific direction; customs are levied on goods that become taxable items at the border, while excise is levied on goods that came into existence inland.
Economic theory evaluates how taxes are able to provide the government with required amount of the financial resources and what are the impacts of this tax system on overall economic efficiency. If tax efficiency needs to be assessed, tax cost must be taken into account, including administrative costs and excessive tax burden also known as the dead weight loss of taxation (DWL). Direct administrative costs include state administration costs for the organisation of the tax system, for the evidence of taxpayers, tax collection and control. Indirect administrative costs can include time spent filling out tax returns or money spent on paying tax advisors.
The United States federal excise tax on gasoline is 18.4 cents per gallon and 24.4 cents per gallon for diesel fuel. Proceeds from the tax partly support the Highway Trust Fund. The federal tax was last raised on October 1, 1993, and is not indexed to inflation, which increased 111% from Oct. 1993 until Dec. 2023. On average, as of April 2019, state and local taxes and fees add 34.24 cents to gasoline and 35.89 cents to diesel, for a total US volume-weighted average fuel tax of 52.64 cents per gallon for gas and 60.29 cents per gallon for diesel.
A vehicle miles traveled tax, also frequently referred to as a VMT tax, VMT fee, mileage-based fee, or road user charge, is a policy of charging motorists based on how many miles they have traveled.
Several theories of taxation exist in public economics. Governments at all levels need to raise revenue from a variety of sources to finance public-sector expenditures.
The benefit principle is a concept in the theory of taxation from public finance. It bases taxes to pay for public-goods expenditures on a politically-revealed willingness to pay for benefits received. The principle is sometimes likened to the function of prices in allocating private goods. In its use for assessing the efficiency of taxes and appraising fiscal policy, the benefit approach was initially developed by Knut Wicksell (1896) and Erik Lindahl (1919), two economists of the Stockholm School. Wicksell's near-unanimity formulation of the principle was premised on a just income distribution. The approach was extended in the work of Paul Samuelson, Richard Musgrave, and others. It has also been applied to such subjects as tax progressivity, corporation taxes, and taxes on property or wealth. The unanimity-rule aspect of Wicksell's approach in linking taxes and expenditures is cited as a point of departure for the study of constitutional economics in the work of James Buchanan.
Cars affect many people, not just drivers and car passengers. The externalities of automobiles, similarly to other economic externalities, are the measurable difference in costs for other parties to those of the car proprietor, such costs not taken into account when the proprietor opts to drive their car. According to Harvard University, the main externalities of driving are local and global pollution, oil dependence, traffic congestion and traffic collisions; while according to a meta-study conducted by the Delft University these externalities are congestion and scarcity costs, accident costs, air pollution costs, noise costs, climate change costs, costs for nature and landscape, costs for water pollution, costs for soil pollution and costs of energy dependency.
This glossary of economics is a list of definitions of terms and concepts used in economics, its sub-disciplines, and related fields.
This page is based on this Wikipedia article Text is available under the CC BY-SA 4.0 license; additional terms may apply. Images, videos and audio are available under their respective licenses.
