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Guidelines for Setting Charges in the Public Sector -April 2017

Definitions of terms used throughout

Allocative efficiency
The efficient allocation of resources ensures that goods are produced at the level at which the last unit produced provides a benefit to the consumer that is equal to the cost of producing that unit.

Capital costs
The costs of the capital assets, such as buildings and IT, that are required for the production of goods or services.

Compliance costs
The costs of complying with a regulation or other requirement, such as collecting information, maintaining records or filling in forms.

Contestable markets, contestability of supply
A market for the supply of a good or service where there is a freedom of entry and where exit is inexpensive. Even if there is only a single current supplier, its prices and profits will be constrained by the threat of new entrants.

Cost of supply
The cost of producing and delivering a good or service.

Cross-subsidies
Subsidising losses on the supply of one output from profits on another.

Cost recovery
The charging of a party for the costs of producing a good, service or activity. Used interchangeably with 'fee setting'.

Cost efficiency
Producing the largest amount of outputs for the smallest amount of resource.

Equity
Fairness or justice.

Evasion
The deliberate non-payment of charges or taxes, or the avoidance of other obligations.

Externalities
When an activity generates benefits that extend beyond those who are immediately involved to others who also benefit - and who cannot be prevented from doing so - it is said to involve a positive externality. Conversely, where it generates harmful effects it is said to involve a negative externality.

Goods, club
A club good has the property that people can be excluded from its benefits at low cost, but its use by one person does not detract from its use by another.

Goods, merit
A merit good has the property that the community as a whole desires the higher use of the output than would be likely if it were charged for at full cost.

Goods, private
A private good has the property that people can be excluded from its benefits at low cost, and its use by one person detracts from its use by another.

Goods, public
A public good has the property that excluding people from its benefits is either difficult or costly, and its use by one person does not detract from its use by another.

Incremental costs
The costs of producing one of a set of outputs, over and above those of only producing the other outputs.

Marginal costs
The costs of producing an additional unit of an output. Short run marginal costs disregard those costs (such as capital costs) which are fixed in the short term. Long run marginal costs include all those that vary with different production levels.

Monopoly supplier
The sole supplier of a good or service. A monopoly supplier situation may be the natural result of the underlying economics of producing the good or service, or may be the result of statutory limitations on the entry of competitors.

Risk exacerbators
Those whose actions create negative externalities or who put a positive externality at risk.

User
Those who use, operate, or receive a benefit of a good or service. In the context of cost recovery, users will be charged fees. In general, the user will typically be the beneficiary of the cost recovered output, but in some circumstances, they may instead be the risk exacerbator.

Cost
The full cost of producing outputs, including all overhead and non-cash costs (such as the capital charge). It is measured in accrual accounting terms.

Outputs
The goods and services produced by a government agency.

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