Suppose that a town is considering a project to install new underground water pipes. Some of the costs are fixed in the sense that they do not increase with an increase in the amount of water consumed. For example, pipes deteriorate over time, independent of the volume of water flowing through them. Hence, it is impossible to pay for the investment in the pipes by charging consumers an amount based on the marginal cost of the water they consume. Under these circum-stances, what might an efficient pricing system look like?
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