Overinvestment When Allocating Costs of Wastewater Treatment Plant

Abstract

There is a potential for overinvestment of resources into flow reduction when two cities jointly own a wastewater treatment plant. One city can shift more of the plant's total fixed cost onto the other city if it reduces its share of the wastewater flow into the sanitary system. Each city has an incentive to reduce its flow of groundwater infiltration and storm runoff into its sanitary system as long as the additional repair cost of doing so is less than the reduction in its total variable (treatment) cost plus the reduction in its fixed cost payment.