Marginal cost and other pricing principles for user charging in transport: a comment

Abstract

This paper responds to issues raised in a paper by Werner Rothengatter entitled, How Good is First Best? Marginal Cost and Other Pricing Principles for User Charging in Transport, which appeared in this journal (vol. 10, no. 2, pp. 121-130). The Rothengatter paper argued that a simple textbook approach for relating prices to marginal social cost in determining user charges may not be optimal in practice. The current paper agrees that several factors mean that pure marginal social cost pricing is not a desirable or sensible aim. However, this does not mean that a totally different theoretical approach to pricing policy should be adopted or that full cost recovery as a principle is a good starting point. Instead, it is possible to measure marginal social cost and move towards it as the basis of transport pricing. Marginal social cost should be the starting point in the development of a pricing policy, with considerations such as budget constraints, equity, institutional issues, simplicity and price distortions elsewhere in the economy also taken into account.