Commentary: On the marginal cost pricing of municipal water

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Abstract
It has been maintained that municipal water supply should be priced so that marginal cost equals price. However, there are likely to be ‘third party’ benefits from some components of municipal water use, primarily from the use of water for landscaping and gardening. Because gardening affects the quality of the urban environment, social benefits may exceed private benefits, and marginal cost pricing may result in a price that exceeds a socially optimal price. The magnitude of divergence of the marginal cost price from the optimal price will depend primarily upon the size of the ‘third party’ benefits.