Municipal water supply and sewage treatment: costs, prices, and distortions

Municipal water supply and sewage treatment utilities in Ontario, Canada, are studied in order to establish their costs of supply and evaluate their pricing practices. Prices charged to residential and commercial customers are found to be only one-third and one-sixth of the estimated marginal cost for water supply and sewage treatment, respectively. For example, the average price to residential customers is $0.32/m(3), while the estimated marginal cost is $0.87/m(3). The estimated cost parameters are combined with estimated residential and non-residential demands functions in order to calculate approximate welfare losses that arise from overconsumption. JEL classification: Q25, L32.