User pays, or beneficiary pays, is a
pricing 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
consumers 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 achiev ...
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 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 public sector agencies ...
. The ability-to-pay principle is one of the reasons for the general acceptance of the progressive
income tax system.
The principle of user pays supports the idea of
horizontal equity, 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 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 organi ...
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 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 ...
. 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 of using
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. Fo ...
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.
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Pricing