Operationalisation of Marginal Cost Pricing within Urban Transport

Charges and taxes for transport have traditionally had little connection to costs, instead being part of broader fiscal policies of raising revenue or directly promoting other goals, industrial, social and environmental. The gap between the costs and actual charges is particularly evident in urban road transport where current pricing mechanisms typically make little or no attempt to reflect concentrations of transport activity in time and space and hence of transport induced costs. Economic theory shows that, under the market approach, marginal cost pricing is a condition for economic efficiency. Still, a huge gap exists between the lessons of economic theory and the possibilities of current technology on one hand, and the achievements in implementing marginal cost pricing thus far in practice on the other. In relation to the broader socio-economic context of marginal social cost pricing, determined by various technological, institutional, legal and political constraints, this report highlights three important aspects or distinctions: the distinction between policy situations with different coverage, the distinction between first-best and second-best situations, and the need for policy packaging.