Two types of organizational systems provide most of the water service in the United States. The investor-owned firm operates on a profit basis generally subject to state commission regulation. The government-owned firm is generally confronted by local control. The comparative efficiency of private versus government firm provision of water services is essentially an empirical issue. Unit costs and other operating statistics are examined for water firms of each ownership form. The analysis shows that private firms tend to have higher operation costs than do government firms, possibly attributable to wage-salary differentials. The analysis also indicates that capital investment in large government firms may result in diseconomies. The analysis creates serious doubt as to whether efficient provision of water services can be better facilitated by large mergers of either ownership form.(KEY TERMS: water utilities; water costs; municipal ownership; private ownership; water utility regulation.) Two types of organizational systems provide most of the water service in the United States. The investor-owned water utility operates on a profit basis, generally subject to state regulation of price and condition of service. The government-owned (mostly municipal) water firm is confronted by control ranging from city council review to independent commission regulation. Although theoretically a non-profit firm, the government system may generate surplus revenues that subsidize local government operation. The ownership forms face similar technological constraints regarding water provision, treatment, and delivery. Government firms dominate the water industry in terms of both absolute numbers (approximately 85 percent) and service supplied (approximately 90 percent).Economists are becoming concerned with the implications of organizational form for the efficient provision of public services. The comparative efficiency of private versus government production is essentially an empirical issue. The few analyses previously published reach conclusions varying with the specific activity examined, but none conclude that organizational form is irrelevant. This paper examines the performance for water utilities of each ownership form, examining average cost data for both system
Ambiguity in the interpretation of marginal cost emerges where capital indivisibility is present. The indivisibility condition is particularly applicable to new water projects in which large capital investments are required to place a central system into full operation. Marginal cost is defined in four ways. The definitions all incorporate future costs and output only; the definitions vary in the extent to which they focus on short‐run versus long‐run allocative efficiency, and in the extent to which they attempt to minimize price fluctuations in the context of lumpy investments.
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