REVENUE Revenue Use from Transport Pricing 29-30 November 2005, Brussels

1. REVENUE Revenue Use from Transport Pricing29-30 November 2005, Brussels Revenue Use and Infrastructure Funds Andreas Kopp OECD/ECMT Transport Research Centre

2. 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

3. 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

4. Optimal taxation • Broad definition of “transport charges” concern different levels of fiscal policy • pure public goods or bads Pigouvian taxes concern general budget policy General prescription minimise excess burden • local public goods or bads Welfare effects are capitalised in land rents Taxing land rents recovers costs of public goods • Indivisibilities and crowding Possibility of a quasi-market

5. 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

6. Optimal Pricing and Investment with Congestion C  C road use G*

7. Capacity Decision as Decision on the Number of Facilities A M A new Price demand relation p A

8. Optimal Pricing and Capacity Choice Quasi-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

9. 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

10. AC P(x) AC Optimal Pricing without Congestion

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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