The Sacramento Bee offers a case study of an under-studied topic. In Davis, California, a new lawsuit contends that residents have been paying a price premium for sewer use and this collected money has been silently used to cross-subsidize the disposal of waste water from government buildings. So, this is a hidden tax on the populace that is mostly borne by those who create the most residential waste water. In recent years, economists such as Chetty and Finkelstein have written about the salience of taxes and government charges. You don't have to be a behavioral economist to realize that government anticipates the opposition to higher taxes but must fund its expenditures. An alternative way to achieve this goal is to raise prices for goods it supplies for which there is no competitive market (such as poop water disposal). In such cases, residents are unaware that they are being "ripped off" because they can't shop around for a price quote from a competitor. The local government is aware that "ignorance is bliss" and takes advantage of this.
As I think about it, the more general issue here relates to bundling and monopoly power. Due to natural monopolies (i.e high fixed costs to entry) and the legal charter, local government faces no competition in providing many services ranging from policing to waste disposal to K-12 education.
Contrast the City of Davis with a multi-product monopolist. The profit maximizing monopolist who sells both lightbulbs and lamps will estimate the elasticity of demand for both products and offer a low price for the more elastic demand product so he can stimulate demand for the complementary product and "price gouge" in selling the inelastically demanded good. In contrast, the City of Davis is a multi-product non-profit maximizing monopolist. It has similar incentives to "price gouge" on inelastically demanded services because this will increase its budget resources.
Universities, including my own, are like the City of Davis as the budget process is quite opaque and this is quite likely to be intentional. This raises efficiency issues. For an example from UCLA read this.
