Economies of scale in community water systems

Abstract

Data sets from the U.S. Environmental Protection Agency's 1995 and 2000 Community Water Systems surveys were used to examine the production costs of water supply systems. The authors estimate water supply economies of scale by estimating the elasticities of both the total unit cost and the individual component costs. For total unit cost, they found that a 1% production increase reduced unit costs by a statistically significant 0.16%. For individual component costs, higher economies of scale in capital, materials, outside services, and other costs and lower, but still positive, economies of scale in labor and energy costs were found. These economies of scale may reflect production economies or suggest that larger systems are better than smaller systems at bargaining and receiving services and materials at a lower unit cost. Importantly, bargaining gains and some production economies do not necessarily depend on water systems becoming physically interconnected.