Social Cost Pricing When Public Transport is an Option Value

Fondazione Eni Enrico Mattei Working Paper No. 67.98

21 Pages Posted: 29 Jan 1999

See all articles by Roberto Roson

Roberto Roson

Ca Foscari University of Venice - Dipartimento di Economia; Bocconi University - IEFE Centre for Research on Energy and Environmental Economics and Policy; Loyola Andalucia University

Date Written: November 1998

Abstract

A well-known principle of welfare economics states that an efficient resources allocation can be achieved in a competitive economy when market prices are in line with social marginal costs. When applied to the transport sector, this implies that the price of the various transport modes should be made equal to the sum of marginal production and external costs, like congestion, accidents, pollution, and road maintenance. It is sometimes argued that the internalisation of external costs would bring about a change in demand patterns with a shift towards public transport and cleaner modes. But, public transport is already favoured by a discriminatory fiscal treatment. Whereas public services are normally (heavily) subsidised, private transport is taxed in several ways and, in some countries, quite substantially so. The application of the ioptimal pricingi principle, therefore, critically depends on how the subsidisation of public services is interpreted.

This paper addresses the issue of optimal pricing of urban transport, using different hypotheses about the treatment of public services. After reviewing some traditional arguments in favour of public transport subsidisation, a new approach, based on uncertainty and option values, is discussed. The implications of this approach are investigated by means of an applied model, where optimal prices for urban transport services in the city of Bologna are computed under alternative assumptions.

JEL Classification: R48, H21

Suggested Citation

Roson, Roberto, Social Cost Pricing When Public Transport is an Option Value (November 1998). Fondazione Eni Enrico Mattei Working Paper No. 67.98, Available at SSRN: https://ssrn.com/abstract=142036 or http://dx.doi.org/10.2139/ssrn.142036

Roberto Roson (Contact Author)

Ca Foscari University of Venice - Dipartimento di Economia ( email )

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Venice, 30121
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HOME PAGE: http://venus.unive.it/roson

Bocconi University - IEFE Centre for Research on Energy and Environmental Economics and Policy ( email )

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Milan, 20122
Italy

Loyola Andalucia University ( email )

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Cordoba, CORDOBA 14004
Spain

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