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1
IMPRINT-EUROPE Seminar Two Implementing Reform
on Transport Pricing Identifying mode-specific
issues, Brussels May 2002       The fiscal
impact of marginal cost pricing  The spectre of
deficits or an embarrassment of
riches?       Rana Roy   5 Bryanston Square,
London W1 
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IMPRINT-EUROPE Seminar Two Implementing Reform
on Transport PricingIdentifying mode-specific
issues, Brussels May 2002 Summary Drawing
on recent and on-going research following 1998
EC White Paper  (in particular Revenues from
Efficient Pricing current ECMT-EC
project)      Full application of marginal cost
pricing for all modes of inland transport ?
large net surplus of tax revenues over
infrastructure costs      The spectre of deficits
(cf. 1995 EC Green Paper) may be now banished
but an embarrassment of riches poses new dangers
and new challenges
3
IMPRINT-EUROPE Seminar Two Implementing Reform
on Transport PricingIdentifying mode-specific
issues, Brussels May 2002 The theoretical
possibility of a net deficit   Recall the
underlying problem that marginal cost pricing is
designed to correct  the double market failure
in the transport system      Case 1 e.g., rail
natural monopolies with high fixed costs and low
marginal costs  average cost gt marginal social
cost ? over-pricing and under-use       Case 2
e.g., urban roads negative externalities
(congestion, pollution, accidents)  average cost
lt marginal social cost ? under-pricing and
over-use
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IMPRINT-EUROPE Seminar Two Implementing Reform
on Transport PricingIdentifying mode-specific
issues, Brussels May 2002 The theoretical
possibility of a net deficit (continued)   Correc
tion of market failure in Case 1 requires
efficient subsides to cover fixed cost   i.e.,
the withdrawal of an implicit, inefficient
excise tax     Correction in Case 2 requires
efficient taxes to internalise externalities   i.e
., the withdrawal of an implicit, inefficient
subsidy      The first correction generates a
fiscal deficit, the second a fiscal surplus   The
net outcome depends on the relative empirical
weight of these theoretical cases
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IMPRINT-EUROPE Seminar Two Implementing Reform
on Transport PricingIdentifying mode-specific
issues, Brussels May 2002 The empirical
likelihood of a net surplus   Application of
marginal cost pricing in contemporary
Europe   Very large price increases are required
to correct urban road congestion    205 for
peak-period gasoline car Brussels, 2005   270
for peak-period gasoline car, 270 for
peak-period truck London, 2005      but
relatively small price reductions for cars (not
trucks) in non-urban roads  with larger price
reductions limited to relatively small non-road
sub-systems
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IMPRINT-EUROPE Seminar Two Implementing Reform
on Transport PricingIdentifying mode-specific
issues, Brussels May 2002 The empirical
likelihood of a net surplus (continued)   Surplus
es arising from correction of urban road
congestion  are likely to off-set deficits
elsewhere in the system (principally
rail/metro)     Reduction in congestion does not
entail a reduction in congestion
pricing   congestion pricing as a market-clearing
rent for scarce space     More generally the
destiny of road freight, urban and
non-urban  stable traffic volumes ? price per
tkm ? ? contribution to tax revenues
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• IMPRINT-EUROPE Seminar Two Implementing Reform
  on Transport PricingIdentifying mode-specific
  issues, Brussels May 2002
• How large a surplus?
•  
• Revenues from efficient pricing
• (adaptation and application of the TRENEN model)
  
• Large net surplus for the three largest EU member
  states
•  
•  
• Net tax revenues (ex-VAT) ? 150 of
  infrastructure costs
•  
• ? 20 billion per annum
•  
•   
• Relative to base case, increase in tax revenues
  (inc. VAT) ? 50
•  
• ? 20 billion per annum

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IMPRINT-EUROPE Seminar Two Implementing Reform
on Transport PricingIdentifying mode-specific
issues, Brussels May 2002 What of the long
run?   Results quoted above represent a short
run optimum with infrastructure capacity taken
as given     In the long run, new investment to
expand capacity ? ? revenues, ? infrastructure
cost, ? net surplus     but CBA will not mandate
a massive road-building programme in our cities
  the surplus derived from premium rents on
premium space will remain
9
IMPRINT-EUROPE Seminar Two Implementing Reform
on Transport PricingIdentifying mode-specific
issues, Brussels May 2002 Fiscal-neutrality?  
Faced with an embarrassment of riches, the danger
of a retreat to limited and partial
reform     Prospective fiscally neutral reforms
in road haulage taxation (2003-06) are welcome
  as a first step (introduction of distance
charges, introduction of new technology)     but
not proposals for fiscally neutral versions of
long term pricing reform   they deliver neither
de-congestion by pricing nor the funds to expand
capacity
10
IMPRINT-EUROPE Seminar Two Implementing Reform
on Transport PricingIdentifying mode-specific
issues, Brussels May 2002 The challenge
ahead   Always to keep sight of the primary
economic aim of marginal cost pricing   maximisi
ng the social surplus     but also to seize the
political opportunities afforded by its
by-product  20 billion per annum in fiscal
surplus       and to develop the decision rules
required to make best use of it   based on the
social return, not immediate budget constraints
or windfalls