Fairness, efficiency and the simultaneity of pricing and infrastructure capacity choice

The primary objective of infrastructure pricing in normative economics and policy discussions is economic efficiency. This focus has led to the proposal that charges for infrastructure use should be based on all internal and external marginal costs associated with the use of infrastructure services. Distributional considerations of the ‘fairness’ of infrastructure pricing often played a supplementary role to help the acceptance of infrastructure charging. This paper sets out a simple framework for a quasi-market for infrastructure services with the perspective of simultaneously determining efficient prices and levels of infrastructure investment. It is shown that, depending on the intensity of infrastructure use, revenues generated by efficient prices do not in all cases cover the full costs of the services. Efficient cost recovery requires an additional fixed charge. Such a combination of a fixed charge and an efficient price per unit of service implies a distributional conflict if users differ substantially in their demand for infrastructure services. It is shown that methods to allocate fixed costs resolve this conflict applying standard norms of distributional justice and being compatible with a bargaining equilibrium among heterogeneous infrastructure users.