The major role of road user charges is assigning the right signals to users and operators of the system. One of the salient features of the motor transport production process is the split ownership of the factors entering this process: the government (or some other public authority) builds and maintains the road system, private or public operators own the equipment (i.*., the motor vehicles), and the passengers (or shippers) provide their time. Each of these parties acts according to the prices (i.e., the signals) they face. The passengers base their decisions on the pecuniary cost of travel and their evaluation of their value of time; the firms and households operating the vehicles base their decisions on their costs (and revenues), ignoring the effect their decisions may have on the cost of others; the road authority makes its decisions on the basis of current (and future) traffic volume, regardless of whether this volume is socially optimum or not (often ignoring the travelers' value of time). A prerequisite for an efficient resource allocation is that all parties face the same prices which equal marginal social costs.

The two most prominent cases where private marginal costs diverge from the social marginal cost in the road sector (Figure 1) relate to congestion and road damage (other cases such as air pollution, noise, road accidents, etc. are not discussed in this paper). The case of congestion has been discussed at length in the literature (Walters, 1961; Mohring, 1976; and others). The traveler entering a congested route Dases his decision on the cost he faces (including his costs of time) but ignores the cost he imposes on other travelers. Formally, let the marginal private costs of travel (if) equal

# 7r P + VT(X)

where P denotes pecuniary costs, T - travel time, V - the value of time and X - traffic volume. For simplicity it is assumed that only travel time is sensitive to traffic volume (the effect of congestion on operating expenses is dismissed as of secondary importance). The total cost of travel equals 7rX, and the marginal social costs:

# MSC = 8(irX)/aX = 7r + XV(8T/aX) .

The second term, XV(T/aX), is the externality imposed on all other travelers; it equals the change in travel time _times_ the number of travelers. To attain the optimum traffic level the road authority has to impose a charge which equals this externality, A = XV(ff/aX).

A second externality, which may be more important in less-developed countries, is the road damage externality (RDE). It has two aspects: the damage caused to the road and the effect the damaged road has on the operating costs (and travel time) of the other vehicles using the road. Engineering data can be used to evaluate the first component of this externality. But it is much more difficult to evaluate, both conceptually and technically, the second component.

The impact of road deterioration on the operating costs of the vehicles using it depends on the maintenance strategy. The deterioration of the road and the increased pavement roughness are associated with cyclical changes in the vehicle operating costs (Figure 2). The costs increase as the road deteriorates and decline sharply when the road is repaved and