12.5 Exercises

1. Municipal Water User Fee (***): Suppose a city’s water utility charges residents a user fee of $0.015 per gallon of water to cover the operational and maintenance costs of water delivery. Last year, the city served 1 million residents, each of whom used an average of 5,000 gallons of water. This year, the city plans to increase the user fee by 10% to fund new infrastructure investments.

   1. Calculate the total revenue generated by the user charges last year and the projected revenue after the increase in the user fee.
   2. If the city’s operational costs are expected to increase by 8% this year, and last year’s total costs were $68 million, will the increased user charges be sufficient to cover the new total costs? By how much will they fall short or exceed the needed amount?
   3. If the city wanted to ensure the user charges cover a 15% reserve in addition to this year’s operational costs, what should the user fee per gallon be set at?