The Treasury Green Book recommends the use of market prices as the basis for appraisal. NATA requires the use of a market price base, arguing that this is consistent with the use of 'willingness to pay', as recommended in Sugden's report Developing a Consistent Cost-Benefit Framework for Multi-Modal Transport.
The market price unit of account expresses prices in market prices. Market price refers to the price paid by consumers for goods and services in the market and therefore includes all indirect taxation (indirect taxation refers to taxation levied on a product and therefore includes excises, duties and VAT). Prices that do not include taxation (e.g. public transport fares) are still perceived by consumers in the market price unit of account.
The factor cost unit of account expresses prices in resource costs. Resource costs are costs that are net of indirect taxation. The prices paid by Government for goods and services are not subject to indirect taxation as any tax that is paid by Government bodies is recovered by Government and thus may be ignored. Government expenditure is therefore in the factor cost unit of account. Business costs and benefits are also assumed to be in the factor cost unit of account as businesses are free of indirect taxation because they can claim it back. An exception to this is fuel duty, which businesses cannot claim back.
Costs can be converted to (or from) market prices by multiplying (or dividing) by the indirect tax correction factor, (1+t), where t is 20.9% (equivalent to the average rate of indirect taxation in the UK economy).
Perceived costs are those which are actually experienced by users. Perceived costs are different for work and non-work trips because businesses can claim back VAT on purchases. Businesses cannot, however, claim back fuel duty and therefore this is included in their perceived cost (where certain classes of PSV can claim back fuel duty this should be treated as a subsidy). Note that business users perceive costs in the factor cost unit of account, while consumers perceive costs in the market price unit of account.
