Production Costs, Inefficiency, and Source Water Quality: A Stochastic Cost Frontier Analysis of Canadian Water Utilities

Abstract

This analysis employs a stochastic cost frontier to estimate relationships between source water quality, production costs, and cost efficiency in Canadian municipal water treatment facilities. Data for the analysis are obtained primarily from a census of water providers that contains detailed information on operational costs, source water quality, and treatment technologies. Results show water quality, as measured by turbidity, is a significant determinant of production costs. The estimated elasticity for turbidity is 0.1, with a 95% confidence interval of 0.06 to 0.14. We find no significant differences in cost efficiency across regions, treatment technologies, output, or turbidity levels. (JEL D24, Q53)