Sustainable Transport Pricing and Charges
Principles and Issues
UNESCAP-AITD
Pages 142/Rs 750
Sometimes, when governments make a mess, it becomes necessary to go back to the basics. This slim volume seeks to do precisely that. It explains, in a rather concise nutshell, just how transport services should be priced or charged for, if they happen to be things like roads or ports or airports.
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Thus, the importance of transportation to public policy in large developing economies cannot be understated. In addition to its central infrastructural role the transport sector requires large capital investments and the return from these projects stretch for many years.
The market for transportation is complicated. These complications arise both on account of the nature of the service, which is differentiated by time, quantity and distance. In addition the service is provided by a variety of alternative competing modes. Each mode has its own specific technological and organisational characteristics.
The factor of distance implies that transportation is organised over networks. Thus, in addition to issues arising due to product differentiation, it is also necessary to examine issues in the context of competition over networks. This latter aspect has not been adequately appreciated in India.
The transport sector tends to have high fixed costs in the short run and low and (maybe even declining) marginal costs in the short run. This creates ideal conditions for cartels and monopolies and government regulations.
Transport choices are influenced by transport prices. And, when there is a mismatch between transport prices paid by individual users and the underlying costs we get distorted decisions with the wrong form of transport occurring at the wrong place and the wrong points in time.
This is why prices have to be right in order to get transport right. This volume seeks to provide a framework to examine optimal pricing rules under these various environments along with some basic premises, which govern these formulations.
It combines the principles of microeconomic theories and welfare economics with the technological and organisational characteristics of transport industries and provides a comprehensive analysis of the problems that inhere in transport pricing.
It strongly recommends that in the interest of promoting sustainable development, users of transport services should be required to pay the social costs of services that they consume. The volume also shows how IT can be used for differential pricing instead of flat pricing. The Indian Railways, should they bother to pay heed, will benefit hugely from the chapter.
An argument for deviating from efficiency pricing is equity and fairness. On distributional grounds, improvements in transportation are not strictly Pareto improving. In every region there may be groups who are made worse off. But the overall effect is to increase the aggregate consumption or production possibility set.
The answer is not to distort prices but instead find mechanisms to compensate the losers. To illustrate: improvements in transport infrastructure may lead to greater growth in regions close to major hubs. But it is also the case that this will lead to greater taxes for the state which can be used to improve other infrastructure and facilities in the regions not so well off.
Optimal pricing may also lead to prices which could lead to low or denied access to people with low incomes. Thus it is felt that prices should be kept low in order to allow or encourage use by such deprived sections.
There is some merit in this argument as denial of access to these services may appear to be loss of some basic human rights. While the argument is legitimate it is necessary to be careful on its application.
The volume also lays stress on the fact that while it is one thing to have market based pricing, it is quite another, in a competitive environment, to ensure fair and efficient pricing. It strongly recommends that a regulatory framework is necessary which needs to be established with care and foresight.