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

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  • Lars-Erik Borge
  • Jørn Rattsø

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%.

Suggested Citation

  • Lars-Erik Borge & Jørn Rattsø, 2005. "The Relationships between Cost and User Charges: The Case of the Norwegian Utility Service," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 61(1), pages 98-119, March.
    • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200503)61:1_98:trbcau_2.0.tx_2-f
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    1. Lars-Erik Borge & Jørn Rattsø, 1998. "Demographic Shift, Relative Costs and the Allocation of Local Public Consumption in Norway," Chapters, in: Jørn Rattsø (ed.), Fiscal Federalism and State–local Finance, chapter 5, pages 71-92, Edward Elgar Publishing.
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    9. Inman, Robert P., 1989. "The local decision to tax : Evidence from large U.S. Cities," Regional Science and Urban Economics, Elsevier, vol. 19(3), pages 455-491, August.
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    Cited by:

    1. Lars-Erik Borge & Marianne Haraldsvik, 2009. "Efficiency potential and determinants of efficiency: an analysis of the care for the elderly sector in Norway," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 16(4), pages 468-486, August.
    2. Borge, Lars-Erik & Rattsø, Jørn, 2008. "Property taxation as incentive for cost control: Empirical evidence for utility services in Norway," European Economic Review, Elsevier, vol. 52(6), pages 1035-1054, August.
    3. Jørn Rattsø & Jon Hernes Fiva, 2005. "Decentralization with Property Taxation to Improve Incentives: Evidence from Local Governments’ Discrete Choice," Working Paper Series 5305, Department of Economics, Norwegian University of Science and Technology, revised 02 Sep 2005.
    4. repec:idb:brikps:445 is not listed on IDEAS
    5. Richard M Bird & Enid Slack, 2007. "An Approach to Metropolitan Governance and Finance," Environment and Planning C, , vol. 25(5), pages 729-755, October.

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    More about this item

    Keywords

    cost control; user charges; incentive mechanisms; principal-agent model; utility services;
    All these keywords.

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures

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