Council solid waste manager Stefan Borowy said specifications for the 60-litre blue bags, which sell for $3.30 each, changed in spring last year to make them "shorter and wider".
The intention was for the bags to have the same capacity, despite the altered design, which was specific to the Lakes district.
"The previous design involved quite a labour-intensive way of manufacturing the bags and then printing them.
"We changed this to one process, so they manufacture and print in the same process, which resulted in a slight decrease in the cost of manufacture, which was then passed on into the cost of the bags.
"It was a good thing, we thought."
However, "a handful" of complaints by vigilant residents and ratepayers over the past six months prompted council staff to undertake a thorough investigation.
That involved filling a 60-litre bag with water "to the brim".
The result: the bag held only 57 litres of water.
Although the council carried out the test on only one bag, the manufacturer - which Mr Borowy would not name as the company had requested anonymity - had run its own tests and had come to the same conclusion.
Over the six-month period the bags had been in circulation, fulltime residents had been disadvantaged by about 60 litres - or one bag.
"We contacted the manufacturer and it has confirmed this week that incorrect settings at the time of manufacture had led to the reduced capacity," Mr Borowy said.
He understood the manufacturer supplied rubbish bags to other councils but was "not aware of any other issues".
There was no pecuniary advantage to the manufacturer, which had apologised for the error and committed to get under way with production of new bags "with a capacity of at least 60 litres".
"Once the new bags have been produced we will remove the old stock from the supermarket shelves."
Mr Borowy said the council wanted to make amends for the error so had negotiated with the manufacturer which had agreed to supply some bags to the council, free.
The council would also come to the party with an offer for any resident who felt disadvantaged by the oversight.
"If people would like to come into [the] council at either Wanaka or Queenstown, any time next week, with proof of residence, they will receive two free rubbish bags per household."
The offer would end next Friday.
Mr Borowy said the council would now "closely monitor" every new batch of bags to ensure residents and ratepayers were receiving full value for money.
