Costs of Nitrogen Runoff for Rural Water Utilities: A Shadow Cost Approach

Abstract

This paper explores the interactions among scale and density economies, productive efficiency, water quality, and customer characteristics, and their impact on the costs of delivering treated drinking water. Implicit benefits of nitrogen abatement are also derived and hypothesis tests concerning their hypothesized drivers are conducted. Key findings are that nitrogen removal costs increase with rising raw water nitrogen concentration coming from agricultural activities, and that network density and system size matter in determining average total costs of community water systems. Merging water systems to take advantage of scale economies may be difficult due to the heterogeneity of the sector, however. (JEL Q25, Q53)