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Operationalisation of Marginal Cost Pricing within Urban Transport

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  • David Milne
  • Esko Niskanen
  • Erik Verhoef

Abstract

Charges and taxes for transport have traditionally had little connection to costs, instead being part of broader fiscal policies of raising revenue or directly promoting other goals, industrial, social and environmental. The gap between the costs and actual charges is particularly evident in urban road transport where current pricing mechanisms typically make little or no attempt to reflect concentrations of transport activity in time and space and hence of transport induced costs. Economic theory shows that, under the market approach, marginal cost pricing is a condition for economic efficiency. Still, a huge gap exists between the lessons of economic theory and the possibilities of current technology on one hand, and the achievements in implementing marginal cost pricing thus far in practice on the other. In relation to the broader socio-economic context of marginal social cost pricing, determined by various technological, institutional, legal and political constraints, this report highlights three important aspects or distinctions: the distinction between policy situations with different coverage, the distinction between first-best and second-best situations, and the need for policy packaging.

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Bibliographic Info

Paper provided by Government Institute for Economic Research Finland (VATT) in its series Research Reports with number 63.

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Date of creation: 31 Dec 2000
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Handle: RePEc:fer:resrep:63

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Keywords: Urban transport; marginal cost pricing; first-best; second-best;

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Cited by:
  1. Vold, Arild, 2006. "Phased implementation of transport pricing for Greater Oslo," Transport Policy, Elsevier, vol. 13(2), pages 140-148, March.
  2. de Palma, André & Lindsey, Robin & Niskanen, Esko, 2006. "Policy insights from the urban road pricing case studies," Transport Policy, Elsevier, vol. 13(2), pages 149-161, March.
  3. Paavo Moilanen, 2000. "Assessing the Effectiveness of Marginal Cost Pricing in Transport - the Helsinki Case," Discussion Papers 223, Government Institute for Economic Research Finland (VATT).
  4. Simon Shepherd, 2003. "Towards marginal cost pricing: A comparison of alternative pricing systems," Transportation, Springer, vol. 30(4), pages 411-433, November.
  5. David Milne & Esko Niskanen & Erik Verhoef, 2001. "Legal and Institutional Framework for Marginal Cost Pricing in Urban Transport in Europe," Research Reports 76, Government Institute for Economic Research Finland (VATT).
  6. Simon Shepherd, 2008. "The effect of complex models of externalities on estimated optimal tolls," Transportation, Springer, vol. 35(4), pages 559-577, July.

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