Why We Should But Don't Pay the Right Prices for Urban Infrastructure

Economics tells us that user charges should be used to finance many local public services and to pay for the related infrastructure. The only other way to do so is taxation. All the other possible ways to finance infrastructure investment that are so often discussed – borrowing, transfers, private-public partnerships and the like – are little more than ways to shift the burden from direct users to taxpayers, past, present or future. In the end some taxpayer at some level of government ends up paying the taxes used that support the transfers, borrowing or private participation. Since no one likes taxes, it is thus a bit curious that so little use has been made of user charges to finance infrastructure investment. A variety of reasons for this neglect may be found in the literature, ranging from technical problems in implementing the right kind of user charges to concerns that charges cannot finance large capital works or that externalities are so important that they swamp direct user benefits, often supported by rather vague expositions about why people do not understand or like user charges as well as almost always by laments about their undesirable distributive effects. This paper reviews this literature and concludes that the basic reasons so little attention is paid to user charge financing are in fact essentially political, although sometimes very deep-rooted and difficult to overcome. Though perhaps simply illustrating the triumph of hope over experience that keeps academics going, the paper concludes by offering a few ways that one may perhaps be able to do a better job in persuading the obviously skeptical and resistant public that it makes sense for user charges to play a much bigger role in financing urban infrastructure investment than is now evident anywhere.