Pricing Municipal Services The strongEconomicsstrong of User Fees.pdfVIP

Pricing Municipal Services: The Economics of User Fees Donald N. Dewees* A B S T R A C T User fees for municipal services may generate revenue for municipalities and their utility commissions, but they are equally important as prices for those services. Pricing services at marginal cost can lead to efficient production and consumption of the service, and efficient allocation of the service when capacity limits are reached; and it can help to guide investment on an efficient basis. Marginal costs should never be lower than operating costs and may be much higher in certain situations. It is important to include opportunity costs and environmental costs in the calculation of marginal costs. These principles are illustrated with respect to waste management and water supply services. KEYWORDS: FEES WASTE DISPOSAL WATER UTILITIES PRICING MUNICIPAL I N T R O D U C T I O N As governments have responded to public pressure to reduce taxes, public spend- ing at all levels in Canada has been constrained, reducing the ability of municipal agencies to fund their services. These developments have led to increased interest in user fees as an alternative to taxation for funding municipal services. This paper looks at user fees from the perspective of the economics discipline, identifying principles that may offer some guidance for the design of such fees. I argue that for some services, user fees are not only feasible but economically desirable, because they help to allocate resources to maximize the satisfaction that we receive from those resources. User fees can constrain demand at a time when it is very expensive to expand supply. User fees can help to mediate situations where users are clamouring for more service and the agency does not have the resources to meet that increased demand. User fees can even help to deal with demand that varies greatly over time, through their tempering effect on such variations. While the main me