MARGINAL-COST PRICING - ITS ROLE IN CONSERVATION

Marginal-cost analysis is critical to a conservation program because all management decisions affecting conservation require a comparison of costs and benefits. Increasing production within existing facilities requires that the revenues derived from the additional sales be compared with the higher operations costs. Also, a decision to expand capacity requires a comparison between expected revenues and the capital and operations costs of the new facilities. An approach is presented for the design of water rates that combines economic theory with the practical aspects of integrated resource planning. Marginal-cost savings are compared with changes in discretionary use, resulting in the calculation of a conservation surcharge. This surcharge is a strong conservation price signal that is relatively easy to administer and that results in economic efficiency.