User pays, or beneficiary pays, is a
pricing approach based on the idea that the most efficient
allocation (and consumption) of resources occurs when
consumer
A consumer is a person or a group who intends to order, or use purchased goods, products, or services primarily for personal, social, family, household and similar needs, who is not directly related to entrepreneurial or business activities. ...
s pay the full cost of the goods that they consume. In
public finance
Public finance refers to the monetary resources available to governments and also to the study of finance within government and role of the government in the economy. Within academic settings, public finance is a widely studied subject in man ...
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 or service of general (economic) interest is any service (economics), service intended to address the needs of aggregate members of a community, whether provided directly by a public sector agency, via public financing availab ...
. The ability-to-pay principle is one of the reasons for the general acceptance of the progressive
income tax
An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable 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
A beneficiary in the broadest sense is a natural person or other legal entity who receives money or other benefits from a benefactor. For example, the beneficiary of a life insurance policy is the person who receives the payment of the amount of ...
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 and
consumption have external effects. Driver who purchase
gasoline
Gasoline ( North American English) or petrol ( Commonwealth English) is a petrochemical product characterized as a transparent, yellowish, and flammable liquid normally used as a fuel for spark-ignited internal combustion engines. When for ...
may believe that they pay for the full cost (user-pays) of using gasoline except for the
greenhouse gases produced. They impose costs on the
environment and are known to contribute to
climate change
Present-day climate change includes both global warming—the ongoing increase in Global surface temperature, global average temperature—and its wider effects on Earth's climate system. Climate variability and change, Climate change in ...
. 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
A fossil fuel is a flammable carbon compound- or hydrocarbon-containing material formed naturally in the Earth's crust from the buried remains of prehistoric organisms (animals, plants or microplanktons), a process that occurs within geologica ...
, 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