BOX 3-7

Unlike private goods that can be purchased at a market price, public goods such as national defense, highways, street lights, or a flood control dam, do not have an explicit market where prices are determined. With no market price, private suppliers would not be willing to provide the good because there is no way to recoup the costs. Samuelson (1954) was among the first to formulate the principle that the optimal output from a public good depends on consumers’ marginal benefits from that output. Funding for the public good may come from general revenue, or each beneficiary could pay an amount equal to the benefits they receive. The latter approach, also known as ‘a benefits tax,’ ‘user pays’ or ‘user finance,’ is reflected in commonly used payments such as highway tolls for highways and parking fees in congested areas (OECD, 2002).

An important element of implementing the beneficiary pays principle (BPP) is to determine whether potential users can be prevented from receiving the benefits of a good (excludability) and whether use by one user impacts the benefits received by another (rivalry). The beneficiaries of goods that are excludable and rival (as are private goods) such as electricity and municipal water supplies, are the simplest to directly identify. The beneficiaries of goods that are nonrival but from which potential users can be excluded (sometimes referred to as “club” goods) are also easy to identify. Examples would include users of parks and highways (up to the point of congestion).

The most difficult type of good to which one can apply the BPP is ‘true’ public goods that are nonexcludable and nonrival. Dams, for example, provide protection to everyone in the floodplain below the dam, and one property owner’s protection does not reduce that enjoyed by another. Also, wetlands provide ecosystem services such as wildlife habitat and flood control that may benefit many people but one person’s enjoyment does not limit the benefits enjoyed by another. Although it may be another. Although it may be more difficult to identify the benefits and beneficiaries, it is still possible to use the BPP to provide for these goods (Pagliola & Wunder, 2008).

The BPP has been applied for the provision of a variety of public goods. A commonly used approach is to apportion the costs of a public good among the beneficiaries. Costs would include planning and design, construction, operation, maintenance, and mitigation. For example, the separable cost-remaining benefits (SCRB) method has long been advised for water project planning (Inter-Agency Committee on Water Resources, 1958) and issues related to implementation are discussed in a number of studies (e.g., U.S. Department of Interior, 2001; De Souza et al., 2011).

A common reason for adopting BPP is to encourage more efficient investment and maintenance in public projects when general revenue funding is lacking. For example, the Federal Energy Regulatory Commission (FERC) recently adopted reforms for electric

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