11.2.06

THE UN-NATURALNESS OF NATURAL MONOPOLY. Another Wisconsin water war is brewing. This time, it's the city of Green Bay and its suburbs, both of which use Lake Michigan water piped from an intake at the base of the Door Peninsula. (The water in the Fox River and Green Bay is too warm in summer and too full of paper-mill runoff to be economically treated for use.) There are scale economies in building and sharing a larger pipe, but applied allocation of common costs is anything but easy.

At the time the city of Green Bay first built the main, the suburbs decided that the stand-alone costs of using well water from local aquifers would be less than the costs of participating in the pipeline.
Green Bay asked the nearby communities of Allouez and De Pere to join the effort. They declined, and that is not surprising. With their bigger brother no longer sucking from the shared aquifer, there would be plenty of well water left for the region's smaller communities.
The well water has too high a radium content to meet new water quality standards. The natural monopoly argument suggests one pipeline for Green Bay and its suburbs would be the cheapest way to bring in more lake water. But any agreement on sharing the costs of a shared input is costly to reach.
The problem was Green Bay and the suburbs could not agree on the price the suburbs should pay. Both sides worried that they would end up with a deal that subsidized the other.
Strictly speaking, any payment by the suburbs to the city of Green Bay that is less than what the suburbs would have to pay for their own pipeline is subsidy-free from the city's perspective. It's also Pareto-improving from the suburbs' perspective, unless they fear some robber baron in the mayor's office cutting off the water.

But city governments, apparently, don't think like economists.
Green Bay, like Milwaukee, worries about its suburbs sucking away its life - and tax base. Green Bay suburbs meanwhile, like Milwaukee suburbs, worry that the big city in the middle will do whatever it takes to strangle growth on its outskirts.
I must confess, however, that the notion of a city going out of business is a bit jarring, which is where this competition metaphor leads. (In the private sector, there is an efficient level of business failure.) On the other hand, that fate might be indicated for Detroit and New Orleans.

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