Walden: Why Conserving Can Cost You More

Mary:  This is Mary Walden with economist MW, welcoming you to the economic perspective.   Today’s program asks why conserving can cost you more.  Mike, you were on a radio call-in program recently discussing conserving water.  A somewhat frustrated caller said the last time folks in his town conserved water, they were rewarded with a big hike in their water rates.  That seems a little strange to me.  Is there a logical explanation?

 

Mike:  Summary Answer

  1. Actually there is, and it all has to do with something economists call fixed costs
  2. Fixed costs – or upfront costs – are expenditures a business has to make before any production and sales take place
  3. A building, factory, and equipment are examples
  4. For water supplies, fixed costs are enormous – billions of dollars are needed to build reservoirs and place distribution pipes
  5. Once the reservoir is built, other costs are minor
  6. For big projects, like reservoirs, fixed costs are paid by borrowing, and the loans are repaid using revenues from customers
  7. But when customers buy less water, the same fixed costs must be paid, so water rates have to rise
  8. I’m MW

 

Mary:  And I’m Mary Walden for N C State Extension


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