Who Should Pay for Infrastructure?

A new study by Canadian scholars says that the users of infrastructure should pay for it generally, not taxpayers. Cato’s Peter Van Doren lauded the study by distinguished fiscal experts Richard Bird and Enid Slack, and dropped it on my chair.

Here are some highlights:

As Adam Smith (1776) said long ago, local public works such as roads and bridges should be financed and managed by the appropriate local government and paid for by those who use them. … [A]lthough there are some reasons for higher level governments to provide some local infrastructure projects, Smith was broadly right. No matter how infrastructure is financed, there is no free lunch. In the end, the bill must be paid either by user charges or by taxing someone and, whenever feasible, user charges are better.

… People should pay directly for many services provided by the public sector, particularly such congestible services as roads or water and sewerage provided to easily identifiable users.

One reason is simply because services that users pay for do not need to be paid from distorting taxes that reduce economic welfare.

Another reason is because when user charges for services fully cover the marginal social cost of providing them people buy such services only up to the point at which the value they receive from the last unit they consume is just equal to the price they pay, so that resources are more efficiently allocated.

Moreover, providers who are financed by full cost pricing have incentives to adopt the most efficient and effective ways of providing the service and to supply it only up to the level and quality that people are willing to pay for.

In addition, when services are financed fully by user charges, political decision makers can more readily assess the performance of service managers -- and citizens can do the same with respect to the performance of politicians.

While user pays should be the general approach, the scholars go on to discuss some of the practical and political hurdles.

All in all, the paper is a nice introduction to the economics of public infrastructure, and is directly applicable to the current infrastructure debate in the United States.

For more on infrastructure, see www.downsizinggovernment.org/infrastructure-investment.