The Relationships between Cost and User Charges: The Case of the Norwegian Utility Service

Lars-Erik Borge and Jorn Rattso

FinanzArchiv: Public Finance Analysis, 2005, vol. 61, issue 1, pages 98-

Abstract: Governments struggle with rising service spending, and user charges represent a possible incentive mechanism to control costs. This paper investigates the relationships between costs and user charges in the sewage industry in Norwegian local governments. The analysis addresses the following questions: (i) To what extent are increased costs passed on to consumers in higher user charges? (ii) Does user-charge financing lead to higher or lower unit cost? The econometric analysis indicates that 30-40% of a cost increase is passed on to consumers in higher user charges. Moreover, user-charge financing has a significant negative effect on the unit cost. An increase in user-charge financing by 10 percentage points is predicted to reduce the unit cost by up to 10%.

Keywords: cost control; user charges; incentive mechanisms; principal-agent model; utility services (search for similar items in EconPapers)
JEL-codes: D73 H71 H72 (search for similar items in EconPapers)
Date: 2005
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