Financial burdens and economic costs in expanding urban water systems

Abstract

Rates of growth of demand, lengths of financing periods, real interest rates, and the types of facilities are shown to be important variables in evaluating the equity (or inequity) between established residents and new‐development residents when urban water and sewer facilities are expanded with public financing. Established residents pay less than the economic cost of facilities when facilities that can be efficiently expanded in an incremental manner are subject to demands that are growing at rates that are less than the real interest rate. They pay more than the economic cost when growth occurs at higher rates. When facilities are expanded at multiyear intervals with excess capacity, payments are equated to costs at lower growth rates. Similarly, increasing real costs of facilities shift that breakpoint to lower growth rates. Modest one‐time changes can be used to offset burdens on established residents when inequities do occur. Inflation has little effect on these results.