Incentives for Efficiency: User Charges and Municipal Spending

Abstract

Abstract User charges have been an increasingly important source of revenue tor local governments. Furthermore, it has been suggested in the public finance literature that user charge finance can increase the efficiency of local government service provision, with the evidence being a reduction of expenditures, ceteris paribus. This paper goes one step further, using an empirical test to distinguishing die quantity effect from the cost effect. An analysis of local sewer service demonstrates that greater reliance on user charge finance does not have a significant impact on the quantity of service provided, but does lead to reduced cost of service. The argument for user charges as an efficiency-enhancing mechanism is thereby strengthened.