ABSTRACT
Under a free market economy municipalities and private firms can escape certain costs associated with waste disposal by passing the problem along to other parties, and may find it to their economic advantage to do so. The ultimate costs throughout a whole watershed are not reduced—in fact, they are increased if offsite costs exceed the costs of reducing waste discharges—but they are borne by someone other than the dischargers. As we have already seen, the incentive to neglect offsite costs would disappear if a single competitive firm managed all phases of water supply and use throughout an entire basin, and if there were no public goods involved, because the external diseconomies would then become internal. The basin-wide firm idea, though useful for illuminating the character and role of external diseconomies, is not a satisfactory solution. Public intervention, however, can cause offsite costs to be reflected in the waste disposal decisions of individual firms and of local government units, and is needed for optimal resources allocation.
