The application of these principles depends on the time frame of our analysis or model, since that determines which resources are in fixed supply and what costs are variable.
The application also depends on the level of aggregation or disaggregation in our model. For instance, in a model with many industries, we will have to consider if some of them are subject to different tax rules from others, and how price deviates from marginal social cost in all the different inter-industry market transactions.
Here we only consider the following:
• Household production of private car trips
• The market for public transport services
• The housing market
• The land market
• The freight transport market
• The market for business trips
• Infrastructure investment and management
Each of these is briefly discussed in the text, and the results are summarised in Table 10.2.
10.4.1 Household production of private car trips
Inputs to the household production of private car trips include own time, a car, fuel, and other elements of the driving cost. Also, parking charges and toll fees will have to be paid. Depending on the time frame, not all of these elements enter fully in the perceived cost P.
Together all these elements form the generalised cost of trips, which is the P of the (WTP – P) in this case. Thus at the correct value of time, the social cost of time use has already been accounted for in the calculation of consumer surplus.
The value of time is not covered here. All the other real resources in the driving cost are considered to be in infinitely elastic supply, so their SC is net of all taxes.
The correction term (P – SC) will then consist of various elements that go into different accounts in our social accounting table. First, the more or less pure transfer parts of P – i.e., parking charges and tolls – will have to be entered in the parking company account and the toll collector’s account, respectively. The costs of providing parking space, operating parking lots and supervising parking form the SC of the parking operator account to the extent they are variable. Costs of toll collection form the SC part of the toll collector’s account to the extent they are variable.
Environmental and accident costs form the SC of the part of the correction term that goes into the “external” column of Table 10.1. Finally, all commodity taxes on the elements of driving costs form the P part (revenue part) of the part of the correction term that goes into the government column. It is supposed that there are no variable costs of tax collection, so in this column there is no SC part.
No other agency is supposed to incur costs or get transfers in association with the household production of private car trips, so these three accounts (the household, government and external columns of Table 10.1) account for the whole of the necessary correction from perceived to social costs. However, if in the transport model it is assumed that travellers perceive less of their cost than they actually have to pay inside the time frame we are considering in the model, then there will be a case for including the excluded cost elements as a correction term that is added to the user benefits in the households’ account.
Elements of the fuel tax may explicitly serve to internalise external costs, like the costs of global warming or congestion costs. The names of the taxes or their purposes do however not make a difference to us. They are treated like any other taxes, and their corresponding external costs are treated like any other external costs. If the tax and the externality equal each other at the margin, the private car users have got the right incentives, but this is not a particularly good reason to delete both the tax and the externality from the social accounting table, since they might not cancel out on average. It was seen above that what should be entered in the social accounting table is the total variable cost and the total external cost, or rather the difference in the totals between the strategy case and the do minimum case. Furthermore, all taxes irrespective of their names are available for redistribution, and affect the efficiency of the economy. Since taxes matter, they should be entered in the accounts as they really are, and not be crossed out against other items.
10.4.2 The market for public transport services
The consumption of public transport services requires own time and a ticket. Together they form the generalised cost of trips, which is the P of the (WTP – P) in this case.
Thus at the correct value of time, the social cost of time use has already been accounted for in the calculation of consumer surplus.
The fare is a transfer to the public transport operator. The correction term (P – SC) in this case consists first and foremost of the public transport operator’s surplus (before any fixed costs have been deducted). Thus P in the public transport operator account is total fare receipts (excluding value added tax if there is one), and SC is the area under the marginal cost curve of the operator, or total variable operating costs.
We assume the operator can reclaim value added taxes on the inputs it buys (this might be different in different countries). Thus the operator’s costs are net of incoming VAT, but not net of other taxes like taxes on fuel or taxes on investments.
There is obviously an element of the correction term that has to be entered in the government account. If there is a value added tax on tickets, then the receipts are entered in the government account. Turning to the operator’s cost side, we consider labour to be a resource in fixed supply, so that when the company uses more labour to produce more transport services, the government will not experience any change in the tax revenue on labour. All other production inputs are however in infinitely elastic supply. The VAT on these has by assumption already been reclaimed by the operator, so there is no VAT on inputs to enter. All other commodity taxes on inputs (perhaps mainly fuel taxes) are to be entered in the government account.
Finally, the external costs of the public transport operation are entered in the
“external” column (we assume that the passengers do not directly produce any external costs except on themselves as a group). The points made above under private car trips against letting elements of the taxes and elements of the external costs cancel each other out are equally valid here.
10.4.3 The housing market
In the short term, houses are in fixed supply, so any taxes on the consumption of housing will be part of the social cost of a house, and there will be no correction term (nothing to enter in the government’s account). There will however be various forms of externalities from the consumption of housing services, like neighbourhood externalities and air pollution costs from heating and other normal activities.
As long as we assume an exogenously given fixed population in our model, each with their own home, this situation will not even change with demolitions and new housing, although the externalities may change.
The existence of housing subsidies and a social housing market should perhaps call for some modifications of this rule. As we do not suppose it is modelled, the issue is not elaborated further.
10.4.4 The land market
Land for residential and business purposes is likewise in fixed supply as long as a certain regulation is kept in place. If however we consider strategies where the regulations can be changed, it may be more natural to switch to the other extreme position and consider land as being in elastic supply, albeit within certain bounds. In that case, more of it can be produced for use in the strategy at a fixed price given by the market price or the assumed value of the unused land, whichever is the higher. In that particular case, the use of more land increases the revenue from property taxes in the government’s account. When the bound is reached, we are back again in the first case, where there is nothing to enter in the government’s account.
10.4.5 The freight transport market
The users of freight transport are mainly firms. Although there might be different kinds of firms subject to different tax regulations, we assume as a rule that they can reclaim value added taxes on the freight services they buy. Thus P in (WTP – P) will be lower than if a private household bought freight services. There will be no value added tax revenue to enter in the government’s account, since by assumption freight transport services are never final consumption. This is all that needs to be said about the user benefits.
Turning now to the correction term (P – SC), we first consider the part of it that is entered in the freight transport company’s account. Here P is sales excluding VAT. By assumption, freight transport companies can reclaim VAT, so their costs on purchased inputs are net of VAT, but not net of fuel taxes and other commodity taxes.
The government gets no VAT from freight transport, neither from the users nor from the transport companies. They do however get other commodity taxes from the use of purchased inputs in the transport companies. These are entered as revenue. Labour is assumed to be in fixed supply, so there is no change in labour tax revenue to enter.
Finally, of course, external costs of freight transport are entered in nature’s account.
These operations accomplish the corrections to social costs in the case of freight.
10.4.6 The market for business trips
It might be debated who the users of business trips are, but at least the businesses are the ones that pay. Since they can reclaim the VAT and business trips are never final consumption, the rules for entering taxes and charges in the social accounting table are exactly the same for business trips by public transport as for freight.
The difference between business trips by car and private trips by car concern the value of time and the driving costs. Leaving aside the value of time, the difference in perceived driving costs may be that the VAT on fuel, oil, repair etc. may be reclaimed.
(Arrangements where the car expenses are covered by the employee and reimbursed in full by the firm are common, but we propose to ignore them here). In the case where VAT can be reclaimed, there will be no VAT from fuel and other driving costs to enter in the government account. Otherwise the rules are the same as for private car trips.
10.4.7 Infrastructure investments and management
We assume that infrastructure investment and management are the responsibility of the government. The actual work may be carried out by private firms or by government agencies as the case may be. The social cost should be the same.
If we operate more than one government account, there might be taxes to pay from the one to the other, and in case there are budget constraints on the both of them, it is best to enter this explicitly. If private firms do the job, the value added tax is entered as a payment in the account of the responsible body and as revenue to the central government. Of course this is a transfer between two government agencies, mediated through the private firm. Taxes on inputs except labour are treated in the same way and thus are entered both as payable by the construction firm and as revenue to the central government. Taxes on labour contribute to the expenses of the construction firm but not to the revenue of the central government.
If the job is carried out by government agencies themselves, there will be no VAT.
With respect to other commodity taxes and labour, the situation is the same as when the job was outsourced to private firms.