Negotiating Development Charges in Ontario: Average Cost versus Marginal Cost Pricing of Services

This article attempts to determine how the interplay of stakeholders in a larger economic and political context influences the design of development charge regimes in particular jurisdictions. As a vehicle for this exploration, the authors pose the question: Why do so many municipalities adopt average cost approaches to calculating development charges when it is widely assumed that a marginal cost approach is superior from an infrastructure and land-use efficiency perspective? The question is addressed through a case study method, which focuses on the creation of development charge regimes in Ontario, Canada, and in particular on eight 'focus' municipalities within the Greater Toronto Area. The article begins by presenting the 'pragmatic' explanations for adopting an average cost approach offered by finance officials and consultants. These explanations present the average cost method as the outcome of the deliberate application of basic principles of efficiency, equity, administrative simplicity and public acceptability. We proceed by showing that such explanations are incomplete or incoherent in important ways and turn to more 'critical' explanations, which require an understanding of developer-municipal conflict over the principles involved in the design of development charges. This leads us to an account of the emergence of development charges in Ontario and the evolving debate between municipalities and developers over who should pay for the infrastructure needed to support growth. This account reveals that there has been a gradual shift in municipal infrastructure financing practices from a marginal cost or 'site-specific' approach, favoured by developers, to an average cost or 'municipality-wide' approach, favoured by municipalities. Associated with this trend has been an evolution from negotiated charges to formulaic charges. In the conclusions, a number of factors underlying this evolution are identified.