User pays, or beneficiary pays, is a
pricing
Pricing is the process whereby a business sets the price at which it will sell its products and services, and may be part of the business's marketing plan. In setting prices, the business will take into account the price at which it could acqui ...
approach based on the idea that the most efficient
allocation of resources
In economics, resource allocation is the assignment of available resources to various uses. In the context of an entire economy, resources can be allocated by various means, such as markets, or planning.
In project management, resource allocation ...
occurs when
consumer
A consumer is a person or a group who intends to order, or uses purchased goods, products, or services primarily for personal, social, family, household and similar needs, who is not directly related to entrepreneurial or business activities. T ...
s pay the full cost of the goods that they consume. In
public finance
Public finance is the study of the role of the government in the economy. It is the branch of economics that assesses the government revenue and government expenditure of the public authorities and the adjustment of one or the other to achie ...
it stands in opposition to another principle of "
ability-to-pay," which states that those who have the means should share more of the burden of
public services
A public service is any Service (economics), service intended to address specific needs pertaining to the aggregate members of a community. Public services are available to people within a government jurisdiction as provided directly through pub ...
. The ability-to-pay principle is one of the reasons for the general acceptance of the progressive
income tax
An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Tax ...
system.
The principle of user pays supports the idea of
horizontal equity
Equity, or economic equality, is the concept or idea of fairness in economics, particularly in regard to taxation or welfare economics. More specifically, it may refer to a movement that strives to provide equal life chances regardless of identit ...
, which states that those in similar wealth and income positions should be treated equally by the tax system. The basic idea is that those who do not use a service should not be obligated to pay for it. As long as the
beneficiary
A beneficiary (also, in trust law, '' cestui que use'') in the broadest sense is a natural person or other legal entity who receives money or other benefits from a benefactor. For example, the beneficiary of a life insurance policy is the person ...
aligns exactly with the user, the user-pays principle works. Those who do not go to a movie are not obligated to pay for someone else to attend.
In public goods, beneficiaries and users sometimes do not align. The divergence of user and beneficiary occurs when
production
Production may refer to:
Economics and business
* Production (economics)
* Production, the act of manufacturing goods
* Production, in the outline of industrial organization, the act of making products (goods and services)
* Production as a stati ...
and
consumption
Consumption may refer to:
*Resource consumption
*Tuberculosis, an infectious disease, historically
* Consumption (ecology), receipt of energy by consuming other organisms
* Consumption (economics), the purchasing of newly produced goods for curren ...
have external effects. Driver who purchase
gasoline
Gasoline (; ) or petrol (; ) (see ) is a transparent, petroleum-derived flammable liquid that is used primarily as a fuel in most spark-ignited internal combustion engines (also known as petrol engines). It consists mostly of organic co ...
may believe that they pay for the full cost (user-pays) of using gasoline except for the
greenhouse gases
A greenhouse gas (GHG or GhG) is a gas that absorbs and emits radiant energy within the thermal infrared range, causing the greenhouse effect. The primary greenhouse gases in Earth's atmosphere are water vapor (), carbon dioxide (), methane ...
produced. They impose costs on the
environment
Environment most often refers to:
__NOTOC__
* Natural environment, all living and non-living things occurring naturally
* Biophysical environment, the physical and biological factors along with their chemical interactions that affect an organism or ...
and are known to contribute to
climate change
In common usage, climate change describes global warming—the ongoing increase in global average temperature—and its effects on Earth's climate system. Climate change in a broader sense also includes previous long-term changes to E ...
. The "beneficiaries" must bear costs not paid in the purchase of gasoline. In that case the user-pays principle results in the driver not paying the full or
social cost
Social cost in neoclassical economics is the sum of the private costs resulting from a transaction and the costs imposed on the consumers as a consequence of being exposed to the transaction for which they are not compensated or charged. In other w ...
of using
fossil fuels
A fossil fuel is a hydrocarbon-containing material formed naturally in the Earth's crust from the remains of dead plants and animals that is extracted and burned as a fuel. The main fossil fuels are coal, oil, and natural gas. Fossil fuels ...
, which creates a strong argument for
regulation
Regulation is the management of complex systems according to a set of rules and trends. In systems theory, these types of rules exist in various fields of biology and society, but the term has slightly different meanings according to context. For ...
and other forms of public intervention. Increasing taxes on gasoline is one possible response that preserves the user-pays principle by increasing the costs to user.
However, such analysis is often complicated by the lack of knowledge that would inform regulators of the efficient level of gas use and the costs of emissions.
{{DEFAULTSORT:User Pays
Pricing