A Survey of Cost and Revenue Allocation Problems

Abstract

This chapter provides a unifying survey of the literature devoted to cost-and revenue-allocation problems arising in a variety of optimization models. In general, the need to allocate the cost of operating or constructing a public facility among its users gives rise to a variety of cost-allocation issues. Such issues were considered, for example, by the Tennessee Valley Authority in the 1930s, when the cost of constructing a huge series of multipurpose reservoirs for integrated management of the Tennessee River had to be allocated to three different purposes: navigation, flood control, and power (Straffin and Heaney [66]). Additional examples include the allocation of an airport runway’s construction cost among the different aircraft using it (Littlechild and Thompson [49]), allocating library cost among its users (Bres, Charnes, et al. [4]), cost allocation in cablevision networks (D. Granot and Huberman [33]), and cost allocation in electric power development (Gately [25]). Revenue allocation problems arise whenever the benefits of joint investments have to be fairly allocated among the participants, or in certain bankruptcy problems where an estate has to be divided among the creditors (see, for example, Aumann and Mashler [1]).