User pays
Encyclopedia
User pays, or beneficiary pays, is a pricing
approach based on the idea that the most efficient allocation of resources occurs when consumer
s pay the full cost of the goods that they consume. In public finance
it stands with 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 the reasons for the general acceptance of the progressive income tax
system.
The principle of user pay 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 pay 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 often do not align. The divergence of user and beneficiary occurs when production
and consumption
have external effects. The driver, who purchases gasoline
, may believe he or she is paying for the full cost (user pay) of using gasoline, except that greenhouse gases are produced. These impose costs on the environment
and are believed to contribute to climate change
. The "beneficiaries" must bear costs not paid in the purchase of gasoline. In this case the user pay 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 pay principle by increasing the costs to user.
Pricing
Pricing is the process of determining what a company will receive in exchange for its products. Pricing factors are manufacturing cost, market place, competition, market condition, and quality of product. Pricing is also a key variable in microeconomic price allocation theory. Pricing is a...
approach based on the idea that the most efficient allocation of resources occurs when consumer
Consumer
Consumer is a broad label for any individuals or households that use goods generated within the economy. The concept of a consumer occurs in different contexts, so that the usage and significance of the term may vary.-Economics and marketing:...
s pay the full cost of the goods that they consume. In public finance
Public finance
Public finance is the revenue and expenditure of public authoritiesThe purview of public finance is considered to be threefold: governmental effects on efficient allocation of resources, distribution of income, and macroeconomic stabilization.-Overview:The proper role of government provides a...
it stands with another principle of "ability to pay
Progressive tax
A progressive tax is a tax by which the tax rate increases as the taxable base amount increases. "Progressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate...
," which states that those who have the means should share more of the burden of public services
Public services
Public services is a term usually used to mean services provided by government to its citizens, either directly or by financing private provision of services. The term is associated with a social consensus that certain services should be available to all, regardless of income...
. The ability to pay principle is one the reasons for the general acceptance of the progressive income tax
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
system.
The principle of user pay 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
Beneficiary
A beneficiary in the broadest sense is a natural person or other legal entity who receives money or other benefits from a benefactor. For example: The beneficiary of a life insurance policy, is the person who receives the payment of the amount of insurance after the death of the insured...
aligns exactly with the user, the user pay 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 often do not align. The divergence of user and beneficiary occurs when production
Production (economics)
In economics, production is the act of creating 'use' value or 'utility' that can satisfy a want or need. The act may or may not include factors of production other than labor...
and consumption
Consumption (economics)
Consumption is a common concept in economics, and gives rise to derived concepts such as consumer debt. Generally, consumption is defined in part by comparison to production. But the precise definition can vary because different schools of economists define production quite differently...
have external effects. The driver, who purchases gasoline
Gasoline
Gasoline , or petrol , is a toxic, translucent, petroleum-derived liquid that is primarily used as a fuel in internal combustion engines. It consists mostly of organic compounds obtained by the fractional distillation of petroleum, enhanced with a variety of additives. Some gasolines also contain...
, may believe he or she is paying for the full cost (user pay) of using gasoline, except that greenhouse gases are produced. These impose costs on the environment
Environment (biophysical)
The biophysical environment is the combined modeling of the physical environment and the biological life forms within the environment, and includes all variables, parameters as well as conditions and modes inside the Earth's biosphere. The biophysical environment can be divided into two categories:...
and are believed to contribute to climate change
Climate change
Climate change is a significant and lasting change in the statistical distribution of weather patterns over periods ranging from decades to millions of years. It may be a change in average weather conditions or the distribution of events around that average...
. The "beneficiaries" must bear costs not paid in the purchase of gasoline. In this case the user pay principle results in the driver not paying the full or social cost
Social cost
Social cost, in economics, is generally defined in opposition to "private cost". In economics, theorists model individual decision-making as measurement of costs and benefits...
of using fossil fuels, which creates a strong argument for regulation
Regulation
Regulation is administrative legislation that constitutes or constrains rights and allocates responsibilities. It can be distinguished from primary legislation on the one hand and judge-made law on the other...
and other forms of public intervention. Increasing taxes on gasoline is one possible response that preserves the user pay principle by increasing the costs to user.