12.1 User Charges

Beneficiaries of certain public goods or services can often be identified at the individual level, allowing charges linked to frequency or volume of usage. This approach can help controlling the consumption with the possibility of price adjustments during periods of high (peak) demand. An example of such peak pricing would be raising toll fees during congestion as used on Interstate 15 in San Diego. Tolls are adjusted in real-time by 25 cents as frequently as every 6 minutes to improve traffic flow. Other examples include fees for using a city’s recreation facilities or parking. An important aspect is the prevention of non-payers from accessing the good or service (i.e. eliminating free riders). For this to work, exclusion must be achievable in a cost-effective manner. In general, user fees are the closest financing mechanism in the public sector that mirrors private sector pricing.

Services must be measurable (i.e. able to be quantified), excludable (i.e., restricted to paying users), and provide individual benefits to be suitable for user charges. There are also a variety of reasons to impose user charges. It reduces the reliance on tax revenue, encourages resource conservation, and helps manage overconsumption (e.g., congestion charges for roads). User charges also align with the benefits principle and allows governments to extend charges to non-residents that use the service.

User charges offer advantages and disadvantages to the government and individuals. On one hand, user charges provide an additional revenue source and enable the tracking of service demand, which may lead to an improvement in operating efficiency. They also enhance financing equity for selected services (e.g., recreational) due to broad usage (e.g., non-residents, tax-exempt entities/individuals) shifting the financial burden away from local taxpayers. On the other hand, some services provide benefits that extend beyond the immediate recipient (e.g., create a positive externality), as seen with sanitation, meaning that user charges may not capture the full societal value of these services. Additionally, user charges can create a regressive financial burden, disproportionately affecting lower-income individuals. Denying essential services to non-payers can also be problematic, especially for necessities like water, electricity, and natural gas.