How good is first best? Marginal cost and other pricing principles for user charging in transport

Abstract

The European Commission has suggested the use of the principle of social marginal cost pricing as a general first-best rule for pricing the transportation infrastructure in member countries, but allows for substantial exceptions from this principle through markups. This paper questions the use of a pricing principle that is obviously less relevant than the exceptions from it. A historical overview of this principle and its basic properties and major caveats are provided, with issues of efficiently providing, financing and managing the transportation infrastructure of primary concern. It is concluded that there is no need for a uniform system of transportation infrastructure prices for all transportation sectors and all regional units of the European Union. A workable and effective pricing system should instead reflect the political objectives, institutional arrangements and lever points of decision-making. A real world oriented pricing system will therefore consist of a number of different and non-uniform elements rather than a single abstract general economic orthodoxy. Some alternatives are suggested that are better suited for long term economic efficiency.