Thesis Number: #6 (Page 6 of 8)

Full, marginal-cost Pricing

HS2 illustrates the imperative need for a partnership between the public and private sectors. Large infrastructure generally requires extensive tracts of land, which can only be assembled with the support of legal sanctions. In addition, regulatory systems are required to maintain the quality of services provided by what are often monopoly suppliers.

The appropriate balance between the public and private sectors is achieved by employing full-cost pricing. This consists of

1. Direct payment for specific services, where these are personally accessed by individuals from the agencies that provide them (as when travelling on a train).

User charges would be very low. They would reflect the “marginal” cost of (say) providing an extra seat on a train. Capital costs should not be included in ticket prices. Under the present garbled arrangement, in which private and social costs are jumbled together, travellers are called upon to defray part of the capital costs of infrastructure. This means that user charges are higher than they ought to be, with consequent distortions to people’s preferences (such as opting to travel by car).

2. Capital costs would be funded out of the rents that the infrastructure generates. These rents are measured within the catchment areas serviced by the infrastructure, as illustrated by the case of schools.

In the case of the extension of the London Jubilee line, the capital cost of £3.5bn was rewarded with a net gain of £14bn, as measured by the increase in land values around the stations stretching from Waterloo to Canary Wharf (Harrison 2006b).

People know how to assess the quality of services they want, and they can relate this to what they can afford. This exercise is performed every time a family chooses where to live. The price of every location includes a range of amenities on which home buyers place a value, when they decide on the location of their choice.

Ordinarily, prices are negotiated through real estate agents. The vendor does not call the agreed price a tax, for the obvious reason: the payment is not an arbitrary levy exacted from someone’s income. The price is symmetrically related to the services which the prospective purchaser judges will fulfil his needs.

But there is an anomaly in this charge. The price of a house is paid to someone who does not provide the services whose value is included in the negotiated price. Public agencies provide the schools, parks, transit systems, and so on, which affect the value of each parcel of land. The money that is paid to private individuals is a monetary measure of the failure of governance. This failure caused Europe’s governments to hand the provision of public goods to banks in the 1990s, creating the financial conditions for the property boom that bust in 2007 (Box 1).