Economies of scale and the equity-efficiency trade-off: Evidence from a piped water network in rural Bangladesh

Abstract

Policymakers who set prices for public infrastructure often anticipate an equity-efficiency trade-off: while higher prices could increase revenues from fee-paying users, helping to offset costs, they may reduce take-up among the poor. But this trade-off is fundamentally altered in the presence of economies of scale, which are common in infrastructure networks. We elicit willingness to pay for a household-level piped drinking water connection in rural Bangladesh, where truthful revelation of preferences is incentivized by the opportunity to connect to a new pipeline network that we construct, and we use project cost data to measure economies of scale. Combining the two, we show that the cost-effectiveness-maximizing price---that which minimizes the cost per connected household---is zero. Economies of scale strongly dominate revenues raised by user fees. More generally, the two conditions needed for a zero price to maximize cost-effectiveness are important economies of scale and high sensitivity of demand to prices near zero, which is well documented across developing countries. Since a zero price naturally maximizes equity, we conclude that economies of scale can eliminate the equity-efficiency trade-off.