LRMC and Charging the Polluter: The Case of Industrial Waste Water in Ireland

Ireland is about to embark on a large programme of expansion of waste water facilities. This raises important questions as to payment of the costs, and in particular of the capital costs of plant that will treat industry's effluent. This paper looks at the pricing of waste water services to industrial dischargers, with the aim of applying the broad principles of public utility pricing and of incorporating environmental considerations. After considering the theoretical optimum level of treatment and the polluter-pays principle, economists' recommendations on capacity pricing by utilities are examined, in particular pricing based on long-run marginal cost. An attempt is made to provide a workable method of applying long-run marginal cost pricing to the capital costs of industrial waste water treatment, at present. Preliminary examples of calculated prices are given. We recommend that prices calculated in this manner be announced soon to enable firms to compare the costs of treatment by local authorities with costs of their own treatment or of cleaner production technology, should these options be open to them. Firms will then be able to reserve capacity at the authorities' plants. Investment decisions by authorities and firms can be taken in the light of correct prices, and aquatic quality should be achieved at least cost to the community overall.