ABSTRACT
Under a free market economy municipalities and private firms not only can escape certain costs associated with waste disposal by passing the problem further downstream, but 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 discharge-but they are borne by someone other than the discharger. As we have already seen, this neglect of offsite costs would be removed if a single firm managed all phases of water supply and use throughout an entire basin and if there were no public goods involved; then the external diseconomies would become internal. While the basin-wide firm idea is very useful to illuminate the character and role of external diseconomies, it has already been explained that in actuality such a solution would be deficient and undesirable. However, several forms of public intervention can, at least to a considerable degree, cause offsite costs to be reflected in the waste disposal decisions of individual firms and of local government units.
