THE CHARGING PRINCIPLE FOR THE DEVELOPMENT AND MAINTENANCE OF TRANSPORT INFRASTRUCTURE

With the onset of an aging society and low birth rates, coupled with tight financial conditions being experienced by central and local governments, the need to ensure transport services that protect people’s life in rural areas and provide infrastructure that strengthens global competitiveness of large cities has become more vital than before. Moreover, costs concerning maintenance and renewal of transport infrastructure are also expected to be needed (MLIT, 2012). Under such a situation, what kind of charging principle should be introduced in order to ensure revenue sources for maintenance and renewal of transport infrastructure, such as roads and railways? The objectives of this paper are: 1) to clarify definitions of short run marginal cost pricing and short run average cost pricing (charging principles when transport infrastructure capacity is given), 2) to explain how to obtain long run marginal cost pricing assuming a condition that can optimize transport infrastructure capacity to meet transport demand, and 3) to demonstrate the validity of short run marginal cost pricing through a planning process that gradually increases or reduces transport infrastructure capacity. 1. Transport System Costs It is necessary to define transport system costs to design charging in transport. Transport system costs refer to the costs arising from the construction and maintenance of transport infrastructure and its use. When considering a cost item, it is necessary to differentiate first between fixed and variable costs. Fixed costs are costs which are not related to traffic volume, such as construction costs. Variable costs are costs determined according to the amount of traffic, such as maintenance costs. The value which divides traffic volume from the aggregate total cost (the sum of fixed costs and variable costs) is the average cost; and the value which differentiates variable cost from traffic volume is the marginal cost. It is also important to pay attention to stakeholders that generate costs. Broadly speaking, the stakeholders consist of that of the transport infrastructure manager doing construction and maintenance, the user using the transport infrastructure, and other stakeholder which can be subjected to positive and/or negative impacts arising from the use of the transport infrastructure although not directly related to the provision and use of transport infrastructure. Transport infrastructure managers and users are assumed to form a pseudo market, and their costs are called internal costs, while costs arising on other stakeholder are called external costs. Although users can be divided into transport companies (e.g. bus companies) who provide transport services and directly use the transport infrastructure, and service users who purchase these transport services, this paper focuses on the former type of users who directly use the transport infrastructure, and looks at how taxes and charges are collected for maintenance and renewal of transport infrastructure. Since transport companies do not exist for "road use by private cars", the transport system is simpler and it is easier to appreciate the distribution of benefits and costs. Therefore, this paper concentrates on the case of “road use by private cars”. Let us suppose that items of transport system costs on the road (i.e. road system costs) can be specifically observed. The road user may use the road by paying C, D, E, and F. Among these, E and F are taxes and charges which the road user pays for car ownership and use. These are transferred to the road manager, and are appropriated for the maintenance of roads. These charges serve as revenue to the road manager, and then are cancelled resulting in no social costs. The ultimate costs remaining are A, B, C, D, G, and H. This sum functions as an aggregate total cost. The charges and taxes which the users pay are not all appropriated for the maintenance of the transport infrastructure. Historically, there exist an earmarked financing system which uses taxes and charges from users of specific transport infrastructure for its maintenance. However, the number of countries using this system has been reduced at the moment. Some examples that have exceptionally remained are the federal gasoline tax of the U.S., the energy tax of Germany, and the axle tax of France. While new road construction becomes difficult partly owing to people’s environmental concerns, the Ministry of Finance, which wants to secure the favourably increasing automobile-related taxes as a source of revenue, abolished the earmarked financing system, and has been using them as a general revenue source. In the newest European transport white paper (EC, 2011), it has been specified that “it is important to establish a financial system in which revenue from transport users is used for the improvement of transport". This is in agreement with the position of this paper which aims at coinciding both benefit and cost. Furthermore, it is necessary to distinguish between short run and long run costs. Short run costs are costs when the given transport infrastructure does not change. Table 1 distinguishes between fixed costs and variable costs, although these are both for the short-term. In the long run, wherein transport infrastructure capacity may change through road widening and road network extension, all costs become variable costs. Therefore, for short run optimization, given the present transport infrastructure, traffic can be rationalized by introducing charges. On the other hand, for long run optimization, a policy is examined to rationalize transport infrastructure capacity given future traffic volumes. Table 1. Road system costs Fixed costs Variable costs (related to traffic volume) Internal Cost Road Manager A: Construction cost B: Maintenance cost Road User (i.e., E and F are taxes/charges transferred to the road manager) C: Vehicle cost D: Time cost, Fuel cost E: Vehicle ownership charges F:Gasoline tax, toll charges, distance-based charges External Cost Other Stakeholder G: Improvement or destruction of scenery H: Congestion, Air pollution The cost functions for two-lane and four-lane roads connecting two cities are illustrated in Fig. 1. As mentioned above, the average cost is the value equal to the sum of fixed cost and variable cost divided by traffic volume. The fixed cost divided by traffic volume decreases as traffic volume increases. However, since congestion arises and time cost increases as traffic increases, the average cost also increases (i.e. convex form). The marginal cost is the increase in total social cost caused by unit increases in traffic. Since the increase in time cost of the society caused by the additional users at congested periods may surpass by far the increase in the concerned user's time cost, the marginal cost curve rapidly increases after crossing the lowest point of the average cost curve. Although the average cost curves of two-lane and four-lane roads are of the same shape, the cost curve for the four-lane road is shifted towards the lower right. As will be mentioned later, economies of scale may be assumed at these numbers of lanes. The long run average cost curve is an envelope curve connecting the bottoms of the short run average cost curves. If the number of lanes and road capacity increases, it can be seen that the long run average cost decreases. For transport infrastructure, it has been pointed out that ‘indivisibilities’, which means that the number of lanes of a road must be an integar, may become obstacles during road capacity optimization. In Fig. 1, the long run average cost cannot be differentiated at the intersection. However, as far as the road is concerned, the road capacity is not a function of the number of lanes, but also a function of the width of each lane and the width of the shoulder. Conversely, it seems that the road capacity can be increased almost continuously if maximum roadway capacity can be secured and designed under a certain width of the street facility. 2. Short Run Marginal Cost Pricing that Realizes Optimal Traffic Given the Transport Infrastructure Let us examine the charging principle given the transport infrastructure. Corresponding to the short run decision-making problem in economics, it is understood that price setting by short run marginal cost (or for accuracy, short run marginal social cost containing external cost), can realize optimal usage of a transport infrastructure. That is, it is believed that traffic volume that maximizes social benefits can be realized using road capacity at that time. Marginal cost pricing is explained using Fig. 2. Let us recall the two-lane short run average cost and the short run marginal cost curves which were shown in Fig. 1. There, a short run user average cost curve is added. The user average cost is the value equal to the user cost (C and D of Table 1) divided by traffic volume. Of the user average cost, the time cost required for travel becomes the major cost (average time value of the road user is about 40 yen/minute). Furthermore, the high and low demand curves are added. Traffic volume Cost Figure 1. Short run average cost, Short run marginal cost, and Long run average cost • Bold line represents long run average cost Short run marginal cost (2-lane) Short run marginal cost (4-lane) Short run average cost (4-lane) Short run average cost (2-lane) If there are no taxes and charges, since the road can be used by payment of the short run user average cost, the road may be used up to Q1 corresponding to intersection A of the high demand curve (traffic volume is equivalent to Q2 at low demand). At this traffic volume, however, total cost increases by the short run marginal cost shown in the Figure due to the increase in the number of concerned road users. Social loss is produced between the short run marginal cost curve and the demand curve (a triangle ABC). The amount of traffic decided by the intersection of the demand curve an