The Mojave Water Agency (MWA) sets water policy and water rates for a desert area that faces a severe water shortage. It has 200,000 customers who are charged $100 per month for the first 20,000 cubic feet (cu.ft) and 1 cent per cu.ft thereafter. The average customer bill is $200 per month. It costs the agency ¼ cent per cu.ft to monitor and bill for usage. The MWA wants to cut costs by replacing metered billing with a flat fee which would be added to each property owner's real estate tax bill. Which is true?

Question

A. The proposed policy will be more expensive to operate and will lead to decreased water usage
B. The proposed policy will be cheaper to operate and will lead to increased water usage
C. The proposed policy will be cheaper to operate and will lead to decreased water usage
D. The most that the MWA should pay the County Real Estate Department for handling the proposed billing process is $6,000,000
E. b) and d) above

Answer 1

B. The proposed policy will be cheaper to operate and will lead to increased water usage

The cost of operating the metering, billing and collecting system would be reduced to the fee charged by the County Real Estate Department. For the customer, the bill will be the same regardless of usage, thus usage will increase. It costs the MWA $75 per customer per month to monitor and bill. The most it should pay is the sum that makes it indifferent between doing the billing itself and assigning those responsibilities to the County.