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Show CHAPTER V REVENUE POTENTIAL OF WATER USER FEES REVENUE ESTIMATION AND POTENTIAL User fees perform two major functions. First, they can be used to allocate resources or control use, such as in pollution control. Second, they can be used to raise capital or revenue to support governmental services. The latter function is of primary interest in this study, and in this chapter estimates are made of amounts of funds that may be generated by fees imposed on major water uses. At least two options are available for making these estimates. One is to find the maximum revenue- generation possible and then determine the level of fee that is implied. Another method is to select a " typical" or reasonable fee and estimate what amounts of revenue would be generated by it. A simple but appropriate formula has been developed in this research that will allow either type of calculation. The formula assumes that supply will not be affected and that anyone who demands water can get it. Revenue Potential Formula and a Simple Illustration A fee levied on a product has two demand effects. One is to reduce consumption because of the increase in price and the other is to induce substitution when alternative products exist. Both of these effects will reduce the revenue generating potential of a user fee or excise tax. Let q be the quantity demanded before the fee, p be the prefee price, and f be the fee. It follows then that the total revenue raised by the fee: T. R. = fq- fdq ( 1) From the definition of the elasticity of demand ( e = p/ q dq/ dp), dq = e( dp) q/ p. For perfect competition and constant costs, f = dp ( dp = Vti for monopoly where marginal revenue equals half of demand). Substitution in ( 1) gives: o eq T. R. = fq - r -( perfect competition) ( 2) f2 T. R. = fq- -^- ( monopoly) ( 3) Differentiating with respect to f gives: -- = n -*• = o ( perfect competition) ( 4) df n p = q - ( monopoly) ( 5) df p Setting this equal to zero in order to maximize revenue and solving for f gives: f = - ( perfect competition) ( 6) 2e f = |- ( monopoly) ( 7) Thus, the fee which maximizes revenue depends on the price and the elasticity of demand. To illustrate the concept, suppose that the water monopoly of the City of Logan, Utah, wanted to improve its water system with funds generated by a water user fee. In 1970, the price of 1,000 gallons of water was 15.6 cents and approximately 1,700,000 of these units were consumed. The elasticity of demand for Logan City water is not known exactly, but assume it to be .75 ( Gardner and Shick, 1969). The fee which will maximize revenue is given by: f = JL = ° i^ = 0.21 1 e 0.75 which substituting in Equation 3 makes the maximum revenue potential about $ 180,216. Estimates for the United States For the United States as a whole and several individual states, Table 4 shows the revenue potential from relatively low levels of fees. A sample calculation for the State of Utah is presented in Appendix C. It is obvious that there is a potential for the generation of substantial funds if society should deem it desirable to raise money by this means. - 35 |