Estimation of the Return on Capital in Municipal Water Systems

Abstract

The shadow return on capital in 75 small municipal water systems is estimated using a gamma frontier variable cost function. The estimated Social Cost of capital exceeds the shadow return by an average ratio of 4.37:1, with a median capital stock inefficiency of $70, 500 per year per system owing to overinvestment in public water supply capital. In addition, actual production costs exceed minimum costs by 36 percent, with a median inefficiency of$24,300 per system. Combining both types of inefficiency and extrapolating to the seven thousand comparable systems nationwide suggests economic waste of more than $663 million per year.