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REVENUERevenue Use from Transport Pricing
29-30 November 2005, Brussels
Revenue Use and Infrastructure Funds
Andreas Kopp
OECD/ECMT Transport Research Centre
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Overview
I. Mobility as a public good: public finance without politics– Transport charges as general taxes– Transport facilities as a local public good– Transport facilities as indivisible inputs with
crowding No welfare economic argument for Road Funds
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Overview cont.II. Political economy of revenue use• Diagnosis of underfunding• Determination of revenue use in the political
process– lobbying – lobbying and voting
• Political equilibrium as a prisoners‘ dilemma• Agreement to infrastructure fund by political
actors
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Optimal taxation• Broad definition of “transport charges” concern
different levels of fiscal policy– pure public goods or bads
Pigouvian taxes concern general budget policyGeneral prescription minimise excess burden
– local public goods or badsWelfare effects are capitalised in land rentsTaxing land rents recovers costs of public goods
– Indivisibilities and crowdingPossibility of a quasi-market
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Quasi-market for infrastructure services
• Central problems of provision of infrastructure services is the indivisibility of infrastructure facilities and crowding– high fixed costs, low marginal costs in the
absence of congestion– decreasing average costs in the absence of
congestion– convexificaton of cost function by congestion
costs
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Optimal Pricing and Investment with Congestion
C
C
road use
G*
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Capacity Decision as Decision on the Number of Facilities
A
M
p A
Price demand relation
A new
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Optimal Pricing and Capacity ChoiceQuasi-market
• works against misperception of pricing being a tax
• implies absence of surpluses
• facilities fully financed by marginal cost pricing, previous tax resources for infrastructure are returned
• in a specific sense a solution of distributive justice:
everybody is small, sum of net trade cancels out,
appeals to the notion of reward equality
But: will hold not for all facilities, if congestion is not strong enough
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Optimal Pricing and Capacity Choice
• with little or no congestion– marginal cost pricing in the above sense is still
optimal– any other price will lead to underutilization of
infrastructure
fixed fee (two part tariff) required to cover full costs
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Optimal Pricing without Congestion
ACP(x)
AC
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Political economics of fiscal policy important?
• If the political process leads to the benevolent dictator’s outcome, there is no argument for earmarking or infrastructure funds
• Optimal fiscal policy consists of lump-sum taxes and transfers as well as linear “taxes” on net trades between firms and households
Even in the absence of institutions like quasi-markets or infrastructure funds policies are implemented as if they existed
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Political economy of revenue use• Strong evidence that political processes do not
mimic benevolent dictator• Almost universal belief that transport
infrastructure is underfunded, stronger concerns on maintenance
• Examples (WB estimates)– in 70s and 80s loss of US$ 45 bill. due to lack
of US$ 12 bill. of maintenance expenditures– in Latin American countries in the same way
loss of US$ 30 bill. annually
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Lobbying
• Lobby groups are principals simultaneously trying to influence the actions of an agent, the government, or parts of the government.
• Government cares about citizens and campaign contributions.
• Popularised version of the common agency model leads to efficient equilibrium.
Infrastructure funds not needed
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Lobbying• But, results depends on
– Feasibility of lump-sum taxes and transfers
– Truthful revelation of contribution schemes (policies offered for contributions): Experimental evidence that non-truthful schemes are relevant
– Lobbies being trapped in prisoners’ dilemma: If all lobbies stop lobbying the political equilibrium is unchanged
Separating infrastructure policies by funds from the general budget process is welfare improving if lobbying is costly
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Voting, Lobbying and Legislative Bargaining
• Lobbying model extended by citizen-candidate model: countervailing voting behaviour possible
• Includes the possibility that strong lobbying for infrastructure investment leads to strengthening of fiscally conservative candidates
• Lobbying similarly influences legislative bargaining, with different portfolios being supported by different interest groups
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Voting, Lobbying and Legislative Bargaining
• Equilibrium– Non-truthful contribution schemes are relevant– Potential that lobbying leads to outcomes that
no lobby prefers is increased, stronger form of coordination failure
– Entry of rent-seeking citizen candidates increases costs of political process
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Conclusion• Economic argument for infrastructure funds
depends on narrow definition of feeding resources• With perfect political process (benevolent
dictator) leads to outcome as if there were infrastructure funds
• Imperfect political process entails potential for inefficiencies in the form of coordination failures between lobbies and lawmakers
There is a potential for lobbies and legislative parties to agree to infrastructure funds to avoid wasteful and futile political action