Multistage Marginal Cost Model of Investment‐Pricing Decisions: Application to Urban Water Supply Treatment Facilities

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Abstract
An attempt is made to apply a previously developed general model of investment‐pricing decisions to the particular problem of choosing the timing and sizes of additions to capacity in urban water supply systems. On the basis of empirical data, typical but hypothetical cost and demand curves for water supply are defined and incorporated into the model. The model is then solved under varying assumptions with regard to rate of growth in demand, the level of the discount rate, and the length of the planning horizon. The results are compared in terms of their efficiency with results that could be expected from conventional approaches to the problem by employing certain arbitrarily assumed schemes of average cost pricing combined with rules of thumb criteria for choosing the size and timing of capacity investment.The major conclusions reached are that at present we do not have the empirical data necessary to effectively implement the general model in the water supply area and that the results do suggest that the multistage marginal cost approach toward planning and operating urban water supply systems might be 10–20% more efficient than traditional average cost approaches.