Wastewater treatment plant effluent can be a major contributor to water pollution in the United States, yet we know little about how actual effluent quality is determined. Although Federal government regulations specify uniform minimum treatment levels for these plants, actual treatment levels vary considerably from this standard. In addition, there is evidence of substantial excess capacity at treatment plants. This paper examines the economic and technical relations between actual operating and design characteristics of plants. We specify and test among alternative models of what determines actual plant performance relative to design performance, including one in which plants have the incentive to “overinvest” and operate with permanent excess capacity due to large Federal subsidies on capital costs. The paper then explores the determinants of actual effluent quality using a supply and demand model in which effluent quality is fully endogenous, allowing treatment levels to be a function of both the costs of control, water quality characteristics, and other regional or regulatory preferences for control. Finally, the model with fully endogenous effluent quality is compared to one in which actual levels of plant effluent quality are technologically determined by the design characteristics of the plant and the exogenous properties of the incoming waste str
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