Study Questions 6

ECO 4554 Economics of State and Local Government Study/Test Questions Topic 6: User Charges These questions are designed as study questions to enhance your economic knowledge and your analytical skills. I will also use them as test questions. Because you have the questions in advance, I expect your answers on the tests to be well-organized, clear, coherent, and concise. You might write trial answers to each question in advance, or at the very least, outline the answers. You may not bring any written materials to the test, but if you’ve prepared answers in advance, you can immediately begin writing and still write competent and thorough answers. Feel free to consult one another on the questions. In fact, I strongly encourage you to discuss the questions with one another. No matter how confident you are of your knowledge, your command of the material and your preparation for the test can be enhanced by sharing your knowledge. Do not, however, simply rely on your fellow students to provide you with the answers. When the time for the test comes, you will be on your own. Although in most cases, the questions do not specifically request that you illustrate your answer with an appropriate diagram, diagrams are usually quite helpful both in undertaking the analysis and in illustrating and explaining your answer. I expect you to know the relevant diagrams, to use them, and to interpret them. I encourage you to include them in your answers. 6-1. (Core Principle) According to Fisher (page 174), “In theory, user charges should operate as benefit taxes…, with an individual’s charge depending both on benefit (use) and cost of the provision.” a.

What are the four general principles of efficient user charges?

b.

Assuming these principles are satisfied, what is the advantage of user charges over taxes? Explain.

6-2. Explain why each of the following statements is inconsistent with using user charges to promote economic efficiency. Based on the theory of efficient user charges, what is wrong with each statement? a.

“We have already paid for the facility through taxes. We should not have to pay a fee to use the facility.”

b.

“It’s alright to charge a fee for use of the facility, but it shouldn’t be any more than enough to cover the operating costs.”

6-3. Fisher (pages 186-193) analyzes efficient user charge financing for five public services: public higher education, K-12 education, water and sewer services, refuse collection, and parks and recreation areas. For each one of these services: • • •

How and to whom are access or capital costs allocated? How and to whom are use or operating costs allocated? How are congestion costs allocated? 1

ECO 4554: Economics of State and Local Government Study/Test Questions: Topic 6 6-4. Student parking at FSU is financed by a “parking tax” (the transportation fee included in tuition charges), a uniform annual fee paid by all students. The parking tax is independent of whether or how often a student uses parking facilities, how long s/he uses parking facilities, or which parking facilities s/he uses. The revenues are earmarked to pay the operating costs of parking services and to pay for improvements to parking, expansion of existing parking facilities, and construction of new parking facilities. [Note: Your response to this question should be based on reasoned, dispassionate economic analysis, not emotion.] a.

Based on the four general principles of efficient user charges, is parking at FSU a good candidate for user charge financing instead of tax financing? Explain.

b.

If the current parking tax were replaced by user charges, how would a typical student’s use of parking facilities change? Would parking facilities be used more or less efficiently? Why?

c.

Explain why an efficient user charge for parking might be greater than is needed to cover the operating costs of parking services.

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