Re-visiting cost recovery for government services

Theory indicates that charging for government services provided to identifiable clients should improve resource allocation. The question arises - what level of fees and charges should be applied. One popular theory is that charges should be calculated by dividing costs in proportion to ‘public’ and ‘private’ benefits, with the client paying only the ‘private’ component. This paper suggests it is more logical to recover all costs at the point of service delivery. The only basis for subsidising services should be in cases when demand for a particular service is less than acceptable at an unsubsidised cost recovery level and other means of increasing use of the service eg cash transfers, taxation concessions are either inefficient or politically undesirable.