12.5 Exercises
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.
- Calculate the total revenue generated by the user charges last year and the projected revenue after the increase in the user fee.
- 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?
- 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?