12.3 Evaluation of User Charges

Imposing user charges on public goods and services allows the government to measure demand as users express their preferences through their willingness-to-pay for the good or service. As long as demand exists, the service can be continually provided without restrictions, even during periods of fiscal shortfall, ensuring stability in service delivery. Agencies can also respond to consumer demand since the process of providing these services operates independently of political considerations. By removing the need for legislative bodies to appropriate funds, user charges minimize political influence, allowing agencies to focus on meeting actual demand rather than relying on budgetary allocations. User charges have implications for both efficiency and equity.

In terms of efficiency, user charges influence economic decisions, such as reducing the frequency of visits to a zoo. However, they may also enhance the operating efficiency of service providers, as revenues are more closely tied to actual demand and usage. According to the benefits principle, user charges are aligned with the idea that those who benefit from a service should contribute to its costs. This contrasts with broad-based taxes like property taxes, where the benefit principle may not apply as directly, particularly for services like a zoo that only certain residents may use.

In terms of horizontal equity, user charges may create disparities among households with similar ability-to-pay. Households that do not use the service are not burdened by the charge, which can be beneficial, but for those who do use it, the financial burden might become significant. This could potentially exclude households from accessing certain services due to cost. In terms of vertical equity, user charges can be regressive, as lower-income users may have a higher relative burden compared to wealthier individuals, given that the cost does not vary proportionately with income.

User charges can theoretically provide adequate financing for operations if they are set to fully cover the cost of service provision. Depending on the elasticity, user charges can also generate more revenue with higher economic growth. For user charges to keep pace with economic growth, revenue would need to increase even without adjustments to the charge rates, which may not always be the case if demand does not grow proportionally. Ideally, user charges should generate a relatively stable revenue stream; however, demand-based fluctuations can introduce volatility. For example, in economic downturns, usage of certain public services may decline, leading to reduced revenues from user charges and impacting their stability as a funding source.