REVENUE Revenue Use from Transport Pricing November 2005, Brussels Revenue Use and Infrastructure Funds Andreas Kopp OECD/ECMT Transport Research Centre

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

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

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

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

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

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

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

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

Optimal Pricing without Congestion AC P(x) AC

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

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

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

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

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

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

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