The average cost approach applies a flat rate cost per demand unit that is determined by comparing current overall costs to the number of people needing that product or service. The marginal cost approach looks at the variability of providing services based on the existing infrastructure or services and the need for new services and capital. The marginal cost approach results in a more detailed analysis of which costs are impacted by growth and available capacity at the operational and geographic level.
For example, a new residential development adds school children to the local school. An average cost approach would determine how much, on average, each student costs the school district and applies that flat rate based on the number of new students generated. The marginal cost approach would identify specific administration and instruction costs, and also look at whether there are enough available seats to accommodate the new students or if a new school building would be necessary (capital).
Two similar development proposals, even a short distance apart, may have very different service costs based on the service district/provider, existing infrastructure and services, and capital improvement plans. Marginal cost analysis is more sophisticated and provides time-sensitivity to the fiscal impact of proposals. Almost all services in the COMPASS FIT are based on marginal cost analysis.
A marginal cost approach is also accomplished in the FIT by including highly detailed land use types. There are up to unique 12 housing types with several value thresholds for each community. This level of detail captures more precisely the demand on services and infrastructure compared to using simple averages.
