City Dwellers Drill for

Precious Fluid
A Public Finance Case Study
of the Issues
Surrounding the Boston Harbor Cleanup

Paul A. Fagin
Master of Public Administration
Bush School of Government & Public Service

922 Spring Loop, Apt. C

College Station, Texas 77840
 CITY DWELLERS DRILL FOR PRECIOUS FLUID

In a 1985 milestone lawsuit, the City of Boston was found to be in violation of the 1972 Clean
Water Act and forced to conform to federal standards requiring the construction of a second water
treatment plant to reduce the bacterial level of its sewage output.1 The lawsuit not only required the
Boston Water and Sewage commission to institute a stricter pollution abatement program, but it also
made the region address the long-standing contamination of Boston Harbor. The city conformed to the
Clean Water Act through an 11-year cleanup and reclamation program that cost approximately $11
billion.2 Much of the costs for the Boston Harbor cleanup were passed onto the public through a cleanup
fee collected from water and sewer bills.3 As bills increased, private businesses responded to escalating
prices by reducing their consumption of resources through inventive means. Businesses drilled their own
water wells to lower their utility bill and reduce their operating expenses. If businesses continue to
engage in such cost mitigation measures, there will be serious implications for future funding of public
projects.

Concepts discussed in case study

The important concepts discussed in the case study were public goods and common-pool goods.
The objective for the City of Boston was to cleanup the harbor. Cleaning the harbor would return this
natural resource to an enjoyable good for the community; it would also comply with federal law. Boston
Harbor falls under the category of a public good, meaning access to the harbor is nonexclusive and its
consumption is nonrival (multiple people can enjoy the harbor together). For most public goods, cities
will spread the financial costs throughout the entire community—in this case, the harbor cleanup.

The city chose to finance the program through a fee added onto the utility bill of Boston water
and sewer customers. While this is an accepted practice by municipal governments, it negatively
impacted private businesses. Specifically, escalating utility bills led to increased operations costs. As is
the case with many services provided by municipal governments, access to Boston’s water and sewer
system is provided at cost to the customer. The water reserve itself is referred to as a common-pool
good, since it is not the exclusive property of the city and is, therefore, accessible to the public.4 An
aquifer is a prime example of a common-pool good because of its universal access and potential for
exhaustion by many users. In the case study, local businesses decided to reduce their overhead costs by
drilling their own wells to gain access to the area’s water reserve. While these measures helped
businesses reduce their costs, the city witnessed declining revenues for the harbor cleanup fee, and a
shrinking customer base paid higher costs on their bill.

Issues debated in the case study

The central issue in this case study is whether the method of financing used by the City of
Boston was appropriate for the type of good involved. The answer to this question is a qualified, “yes.”
As mentioned, the cleanup of Boston Harbor was a costly endeavor for a public good. The difficulty in

1
"New Stage of Harbor Cleanup Set to Start - The Boston Globe." Boston.com. Web. 10 Sept. 2010.
<http://www.boston.com/news/local/articles/2007/09/12/new_stage_of_harbor_cleanup_set_to_start/>
2
Bothner, Mike. "Turning Point in Boston Harbor Clean-Up." Sound Waves - U.S. Geological Survey Coastal and Marine Science Monthly
Newsletter. Web. 13 Sept. 2010. <http://soundwaves.usgs.gov/2000/10/>.
3
Mikesell, John L. Fiscal Administration: Analysis and Applications in the Public Sector. Boston, MA: Wadsworth, 2011. Print.
4
Ibid.
funding such an expensive project is that individuals derive varying levels of utility from a public good.
For example, individual A may take great pride in the harbor and be willing to pay a greater share of the
costs for pollution abatement then individual B. If fees are assigned based on the utility derived from the
individual, then there would be an asymmetrical rate schedule, and the necessary funds to complete the
project may not be reached. If only one group paid for the cleanup, they could not stop others from
enjoying the good free of charge. This dilemma is commonly known as the problem of the free rider, or
a situation in which a consumer has an incentive to underestimate the value of a good in order to secure
its benefits at a lower cost.5 From the details of the case, it appears that Boston officials wrestled with
numerous policy options to prevent free riders when they chose the project’s funding mechanism. As
Mikesell describes, “if the total social benefit of a project outweighs the total social cost, then the project
is desirable for the community.” Furthermore, if government levied an equal per capita tax, then all
individuals would be better off with the project and the tax, than without them.6 To the City of Boston,
the harbor cleanup project would increase social welfare at a minimal cost to the individual because the
entire community shouldered the costs.

To understand similar practices in public financing, a contemporary example might be helpful. In

early 2000, the City of Bryan, Texas, began to investigate the problem of wear and tear on public streets
from large, city vehicles used in the transportation and drainage of solid waste. Solid waste pickups for
residential and commercial use were processed on a contractual basis through Bryan Texas Utilities
(BTU), and customers received an itemized bill each month. The use of heavy vehicles in the transport
of solid waste degrades the quality of city streets—necessitating frequent repairs and maintenance—and
this cost was accounted for in the customer rate schedule. However, private businesses began to contract
with private waste removal services, which still damaged the road but were unaccounted in the rate
schedule. In economic terms, the market transaction between two actors created harmful side effects in a
nonmarket fashion, also known as a negative externality. In 2004, the Bryan City Council addressed
this problem by establishing a transportation and drainage fee for all residential and commercial
customers within the city limits of Bryan.7 The council determined that the equitable method for
instituting the transportation fee would be to make it mandatory for everyone, but provide different rate
schedules for commercial customers based on square footage (e.g. – Small Non-Residential, $49;
Medium Non-Residential, $84; and Large Non-Residential, $210). The transportation and drainage fee
was included in BTU’s monthly customer bill. Much like the City of Boston, Bryan officials financed a
public good—in this case, public roads—through a universal fee that was attached to the utility bill of
everyone in the city. Bryan’s transportation fee is not an identical example to the Boston Harbor
cleanup, but it does illustrate similar methods in the financing of public goods through the taxing of non-
public goods.

Recommendations to Boston City Council

There are many possible actions the Boston City Council can undertake to reclaim the lost
revenue for the harbor cleanup fee. I think it would be wise to stay with market-based principles to
resolve the situation. A potential solution would be to require a permit for the construction of water
wells and an annual renewal fee for the maintenance and safety of the well. As described in the case, the

5
Browning, Edgar K., and Mark A. Zupan. Microeconomics Theory & Applications. 9th ed. Hoboken: John Wiley & Sons, 2006. Print.
6
Mikesell, John L. Fiscal Administration: Analysis and Applications in the Public Sector. Boston, MA: Wadsworth, 2011. Print.
7
"Transportation and Drainage Fees." The City of Bryan, Texas. Web. 14 Sept. 2010.
<http://www.bryantx.gov/departments/?name=trans_drainage_fees>.
environmental impact from added water wells could potentially lower the water tables and lead to public
safety concerns for the city’s Back Bay area. In particular, scientists believe that if the water table is
lowered the structural support for buildings in the Back Bay, immersed wooden pilings, will be exposed
to air and begin to rapidly decay. This scenario has not yet been proven, but it does foreshadow
impending problems for the city that it can solve through commercial permits.

The justification for permitting process and an annual renewal fee would be to replenish the
harbor cleanup fund and to research any secondary effects caused by increased wells. Research would
determine the structural integrity of facilities affected by the water table (current and future projections)
and develop a plan for the implementation of infrastructure projects that would reinforce the support
pilings in the Back Bay area. The fee for the construction permit should be used to supplement the
revenue lost from the harbor cleanup fee. The price of the permit and the annual fee should be a
percentage of the construction costs for the well (see Appendix A). For example:

Cost of drilling water well- $ 12.00/ft; 475 ft to access the water reserve; $ 12.00 x 475 ft = $ 5,700.00 x
10% = $ 570.00
Once the price is determined, the annual renewal fee should be set at that price level and revenue
could be used to help fund the harbor cleanup. The renewal fee is to ensure that private wells will meet
city standards for operations through an inspection process. Annual authorization of the maintenance
permit would signify that the wells are being operated in a manner that ensures the safety of employees
and customers. The reasons mentioned would create the proper justification for instituting permit fees,
and the economic effects would cause businesses to think twice before drilling. Establishing a system of
permits for private water wells would shift the costs paid by businesses from the harbor cleanup fee to
the construction and maintenance permits. Businesses would have to run a cost-benefit analysis and
determine if the total benefits they receive from the well is greater than the total costs it would require to
operate the well. If their projected total benefit is less than the total costs, they may choose to continue
using the city’s water and sewer system. The two choices are forcing businesses to determine what their
optimal level of expenses should be. The permits system creates city-approved standard for the
operation of private water wells, and the funds are used to finance a public good.
Table 1- Construction Permit and Renewal Fee Implementation Plan:
Recommendation Implementation
Establish an application process for construction permits of • Private businesses wanting to drill private wells must
private-use water wells, based on a designated commercial size apply for a construction permit with the city—
(small, medium, large). established by the Boston City Council.
• Applicants should provide the following materials
with their construction permit application:
schematics of construction, construction company,
and an environmental impact statement.
Require an annual renewal fee to protect the safety of citizens • Private businesses must renew their permits
impacted by private wells. annually.
• City engineers will meet with operators of private
wells to evaluate their standard operating procedures.
• Water must be tested in a third party lab and the
results submitted to the city health inspector.
The city should obligate a percentage of the revenue received • To continue with the efforts of the harbor cleanup
from construction permits to the Boston Harbor Cleanup the city will allocate monies from the construction
project and the remaining percentage to the structural condition permit and annual fee.
of the Back Bay area. • The city will invest monies into environmental and
engineering research to determine any secondary
effects from increased wells.
Concluding Thoughts
The issues outlined in the case study suggest that the governmental financing of public projects
may become increasingly complex because of the self-reliance of private businesses. In the future, states
and localities may have to get creative in their funding methods and borrow from the lessons learned by
the City of Bryan. In many ways, a flat tax or fee may be the most equitable and efficient manner to
collect revenue for public projects. I would like to return to the initial question of the case study—was
the City of Boston’s approach to financing appropriate for the good involved—and suggest a new
question: is it wise to place such a high fee on a good of which the relative elasticity is unknown. The
relative elasticity of water and sewer services were put to the test when businesses grew tired of paying
additional fees and searched for alternative ways to reduce their consumption of a common-pool good.
Perhaps the biggest question is whether governmental bodies should attempt to diversify their revenue
portfolio to ensure the sustainable financing of future capital projects. Put simply—should governments
put all their eggs in one basket.
Appendix A

Revenue Estimate from construction permit

Table 2- Revenue Estimate

REVENUE ESTIMATE: CONSTRUCTION PERMIT AND ANNUAL RENEWAL FEE
Business FY 1 FY 2 FY 3 FY 4 FY 5 Total
Classification (permit w/
fee)
Small Non- $ 1,140.00 $ 570.00 $ 570.00 $ 570.00 $ 570.00 $ 3,420.00
Residential
Medium Non- $ 2,280.00 $ 1,140.00 $ 1,140.00 $ 1,140.00 $ 1,140.00 $ 6,840.00
Residential
Large Non- $ 3,420.00 $ 1,710.00 $ 1,710.00 $ 1,710.00 $ 1,710.00 $ 10,260.00
Residential

Note: The revenue estimates presented in both table 2 and figure 1 due not incorporate numerous permit
applicants. The number of applicants, for each commercial size is based on square footage and
illustrates only on applicant/category.
Figure 1- Construction Fee Revenue Over Time