Saturday, 11 September 2010

SCUTs or how to make life messy...

   Last week, the major decision from Government was to introduce tolls in highways that were built under the concept of "no cost to the user" - Government would pay private contractors that built and operate the highway according to traffic (with some "demand insurance" though).
   Now, faced with severe budget constraints and having to cut down public spending, the Government introduced payment in highways where people were already used not to pay.
   But given the protest of local populations, that were using arguments put forward some years ago by the same Government, exemptions and discounts were created, based on household distance to the highway.
   From a pure economics viewpoint, price discrimination, as this is the case here, can be welfare increasing - translating from our jargon, it may be good for society that different prices apply to different people.
   The problem is when pure economics meets political economy - by having differential treatment as a rule, everyone will claim and press the Government to have particular exceptions - thus transforming tolls in highways into a bargaining game.
   I wonder what will be the end result, especially if in highways where no price discrimination exists populations start demanding application of the same rules.


  1. Let's skip trying to understand the reasons for such complex systems...
    Shouldn't we re-assess tolls as a means of applying the user-payer principle?
    Unless tolls were applied to every single traffic infrasctructure, or at least to most of them except individually justifiable exceptions, there is no user-payer principle in place.
    Tolls are then no more than a means to transfer elastic demand from good and safe highways to damaged and dangerous roads. Probably not their purpose.
    On the other hand, there is an extremely simple permanent, universal and fair pay-per-use system: the fuel tax.
    What is the economic sense of applying tolls selectively as a means to finance some infrastructures, instead of applying an universal system as a fair means to finance all infrastructures?

  2. But why assume that the user-payer principle applies? That seems to be the weak justification of some political parties to make tolling highways seem the "fair" choice.

    What is happening in fact is that you have a user-payer principle for all infrastructure in the form of the fuel tax, as you mention, and on top of that you have a premium fee for the use of premium infrastructures. It seems very reasonable for me to look at it this way. As long as in fact there are reasonable (although decidedly worse) alternatives in the standard infrastructure network, I am totally confortable viewing highways as a premium network where I am asked to pay extra.

    Price discrimination through local incentives is of course possible, but in my view undesirable in most of the SCUT cases we are discussing. I find it difficult to accept that you really need such incentives in reasonably developed areas such as the Algarve or the northern seaboard of Portugal.

  3. Assuming that the invoked reason for tolling is its real reason is not necessarily unreasonable...
    This view on premium pricing is interesting, but, as far as I can understand, once a highway is in place, the toll price that maximizes global welfare is zero. Am I wrong? I therefore fail to see the advantages of such a pricing. Unless tolling is in fact used to pay the infrastructure where it is in place.
    Furthermore, the assumption that "there are reasonable (although decidedly worse) alternatives in the standard infrastructure network" may be more carefully assessed: are you aware of any "reasonable" standard infrastructure you may use to travel from Lisboa to Porto? Or from Lisboa to Almada?

  4. "As long as in fact there are reasonable (although decidedly worse) alternatives in the standard infrastructure network"

    The thing is, in many cases there isn't one. Lisbon to Almada is just one of the many cases where the "free" alternative is way more expensive than the "premium" alternative.

    Actually the only "premium" road that I know has a viable alternative is the A2, you can use the IC1 instead (and I do that pretty much always)

  5. SCUTS were developed for several different reasons
    1) Smooth the differences between developed areas and undeveloped areas.
    2) Score big in the next election round

    The downsize is that the political cost to reverse the decision is far heavier than if there had been no SCUTS in the first place.

    In theory, the best alternative is in fact the application of the user's pay principle, and price discriminate not according to one's income but to the size of the vehicle.

    As said above price discrimination could result in a welfare increase and social unrest. However at the end of the day when it comes to taxes they are already "price discriminated". So there is no need to do this at the toll. It is better to collect the same from everyone and distribute it fairly afterwords.

    If only we had kept it simple...