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User Fees (in Municipal Finance)

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PPGPortal > Home > Concept Dictionary > T, U, V > User Fees (in Municipal Finance)
 
User Fees (in Municipal Finance)

User fees are charges that governments impose on citizens for the use of services like water or transit to link benefit received from the cost of delivering them.

(Richard M. and N. Enid Slack (1993). Urban Public Finance in Canada. Second Edition. Toronto: John Wiley and Sons, pp. 67-73.)

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There are a number of benefits associated with user fees, or marginal cost pricing. Most importantly, they promote economic efficiency. They link citizen benefit from services to the cost of delivering them, and make it less likely for citizens to overuse consumer services. They also provide demand signals to government allowing for more efficient allocation, and provide appropriate capital investment signals. While there are some public services that simply cannot be charged for, whether on equity or efficiency grounds, user fees are reflective of the presumption that services should be charged for wherever possible if governments are to be able to provide the right balance of services that citizens are willing and able to pay for.

Bird and Slack identify three types of local ‘charges’. Services fees are levied for performing specific services or granting access. They are generally quite minimal and intended to recover administrative costs. They include marriage, vehicle, dog or business licenses. By contrast, ‘public prices’ are intended to provide governments with revenues from the sale of private goods and services that the public service has deemed it necessary to provide. This could include hydro, water, public transit, auto insurance and a number of others. The third category is described as “special benefit taxes.” Like some fees but unlike ‘public price’ services, these represent compulsory charges that contribute to local revenues. Including special assessments, development charges or special property taxes for sewers or streetlighting, these charges generally provide collective benefit while also benefiting individual taxpayers (often by increasing their property values). (1993, 69-70)

Major examples of user fees include water pricing and public transit. Water is usually priced differently in different jurisdictions, though there is generally a fixed or flat rate. The price can be varied to rise during peak usage times or seasons, or to include an excess use charge. Transit is generally funded partly through provincial grants and municipal allocations, and partly through user fees at the fare box. These user fees can be charged in the form of a monthly pass or by use. In some jurisdictions, pricing is varied for peak hours or for longer distance usage.

Cities, however, have often been hesitant to use marginal cost pricing. In both the water and transit examples, true marginal cost pricing – or charging users exactly what cost they impose – is difficult or impossible to achieve for a variety of reasons. There are political or moral concerns about inequitable distribution if the poor cannot afford to pay. (It should be noted though that flat rates can also act as a subsidy for the rich.) It can also be challenging or costly to make long-term investments in the infrastructure to monitor demand, as with household water meters. User charges can also be costly to collect and administer. Lastly, public sector pricing can be sticky – or difficult to adjust to reflect the true cost – because of the obvious political ramifications from citizen dissatisfaction.
     
User Fees (in Municipal Finance)

User fees are charges that governments impose on citizens for the use of services like water or transit to link benefit received from the cost of delivering them.

(Richard M. and N. Enid Slack (1993). Urban Public Finance in Canada. Second Edition. Toronto: John Wiley and Sons, pp. 67-73.)

---------------------------------

There are a number of benefits associated with user fees, or marginal cost pricing. Most importantly, they promote economic efficiency. They link citizen benefit from services to the cost of delivering them, and make it less likely for citizens to overuse consumer services. They also provide demand signals to government allowing for more efficient allocation, and provide appropriate capital investment signals. While there are some public services that simply cannot be charged for, whether on equity or efficiency grounds, user fees are reflective of the presumption that services should be charged for wherever possible if governments are to be able to provide the right balance of services that citizens are willing and able to pay for.

Bird and Slack identify three types of local ‘charges’. Services fees are levied for performing specific services or granting access. They are generally quite minimal and intended to recover administrative costs. They include marriage, vehicle, dog or business licenses. By contrast, ‘public prices’ are intended to provide governments with revenues from the sale of private goods and services that the public service has deemed it necessary to provide. This could include hydro, water, public transit, auto insurance and a number of others. The third category is described as “special benefit taxes.” Like some fees but unlike ‘public price’ services, these represent compulsory charges that contribute to local revenues. Including special assessments, development charges or special property taxes for sewers or streetlighting, these charges generally provide collective benefit while also benefiting individual taxpayers (often by increasing their property values). (1993, 69-70)

Major examples of user fees include water pricing and public transit. Water is usually priced differently in different jurisdictions, though there is generally a fixed or flat rate. The price can be varied to rise during peak usage times or seasons, or to include an excess use charge. Transit is generally funded partly through provincial grants and municipal allocations, and partly through user fees at the fare box. These user fees can be charged in the form of a monthly pass or by use. In some jurisdictions, pricing is varied for peak hours or for longer distance usage.

Cities, however, have often been hesitant to use marginal cost pricing. In both the water and transit examples, true marginal cost pricing – or charging users exactly what cost they impose – is difficult or impossible to achieve for a variety of reasons. There are political or moral concerns about inequitable distribution if the poor cannot afford to pay. (It should be noted though that flat rates can also act as a subsidy for the rich.) It can also be challenging or costly to make long-term investments in the infrastructure to monitor demand, as with household water meters. User charges can also be costly to collect and administer. Lastly, public sector pricing can be sticky – or difficult to adjust to reflect the true cost – because of the obvious political ramifications from citizen dissatisfaction.

Approved for glossaryposting by Ben Eisen on March 20, 2011


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