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tions. When the optimal economic solution is complex, it creates complex cost allocation problems since it is necessary to divide the costs among many purposes and groups. Thus, the search for improved economic efficiency exacerbates the difficulty of deciding how costs should be divided. The concept of equity is an essential part of the cost allocation problem. Young (1994a) defines a number of key terms to provide language to further the discussion. According to Young, an allocation is an assignment of the objects to specific individuals or groups. It is a decision about who gets a good or who bears a burden, and it is usually decided by a group or an institution acting on behalf of the group. An allocation problem occurs whenever a bundle of resources, rights, burdens, or costs is temporarily held in common by a group of individuals and must be allotted to them individually. Exchange involves many voluntary, decentralized transactions and can only occur after the goods and burdens have been allocated. As a result, allocation comes first, and exchange follows.
With regard to equity, Young (1994a) stressed that it is a complex issue:
Equity is a complex idea that resists simple formulations. It is strongly shaped by cultural factors, by precedent, and by the specific types of goods and burdens being distributed. To understand what equity means in a given situation, we must therefore look at the contextual details.
According to Young (1994a), allocation rules usually exhibit one or a combination of three concepts of equity:
Parity: claimants are treated equally.
Proportionality: acknowledges differences among claimants and divides the goods in proportion to these differences.
Priority: the person with the greatest claim to the good gets it.
The earliest reported literature on the cost allocation problem in water resources is a book by Ransmeier (1942), who reported on the results of several years of debate regarding how the costs of the Tennessee Valley Authority (TVA) should be divided among flood control, navigation, fertilizer production, national defense, and development of power. This debate was important because it represented the first time that public water projects would compete with private water development. In particular, there was strong concern that multipurpose public water projects could out compete existing private hydropower development, because a significant part of the total cost could be assigned to other purposes. These deliberations produced five criteria for cost allocation (Ransmeier, 1942):
An allocation method should have a reasonable logical basis.