IDEAS home Printed from https://ideas.repec.org/a/wsi/wepxxx/v05y2019i02ns2382624x18500145.html
   My bibliography  Save this article

Can Allocation-Based Water Rates Promote Conservation and Increase Welfare? A California Case Study

Author

Listed:
  • Kenneth A. Baerenklau

    (School of Public Policy, 900 University Ave., University of California, Riverside, CA 92521, USA)

  • María Pérez-Urdiales

    (School of Public Policy, 900 University Ave., University of California, Riverside, CA 92521, USA)

Abstract

An allocation-based rate (ABR) is a special type of increasing block rate (IBR) price structure that is receiving increased attention from urban water suppliers in places like California where population growth and climate change continue to increase water scarcity. Previous work by Baerenklau et al. [Baerenklau, KA, KA Schwabe and A Dinar (2014a). Allocation-based water pricing promotes conservation while keeping user costs low. Agricultural and Resource Economics Update, 17(6), 1–14; Baerenklau, KA, KA Schwabe and A Dinar (2014b). The residential water demand effect of increasing block rate water budgets. Land Economics, 90(4), 683–699.] investigates the conservation potential of ABR and finds that consumption under ABR was 10–15% below that of a comparable uniform rate structure for a southern California case study. This paper extends that work by using the discrete–continuous choice framework to estimate household-level welfare effects of ABR for the same dataset. We find that despite the observed decrease in consumption, average household welfare actually increased under ABR due to its non-linear structure. We also find that similar results would have been achievable with a simpler standard IBR structure. While either of these block rate structures is welfare-preferred to uniform price and quantity instruments, neither clearly dominates the other.

Suggested Citation

  • Kenneth A. Baerenklau & María Pérez-Urdiales, 2019. "Can Allocation-Based Water Rates Promote Conservation and Increase Welfare? A California Case Study," Water Economics and Policy (WEP), World Scientific Publishing Co. Pte. Ltd., vol. 5(02), pages 1-26, April.
    • Handle: RePEc:wsi:wepxxx:v:05:y:2019:i:02:n:s2382624x18500145
    DOI: 10.1142/S2382624X18500145
    as

    Download full text from publisher

    File URL: http://www.worldscientific.com/doi/abs/10.1142/S2382624X18500145
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1142/S2382624X18500145?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Garcia, Serge & Reynaud, Arnaud, 2004. "Estimating the benefits of efficient water pricing in France," Resource and Energy Economics, Elsevier, vol. 26(1), pages 1-25, March.
    2. Bockstael, Nancy E & McConnell, Kenneth E, 1983. "Welfare Measurement in the Household Production Framework," American Economic Review, American Economic Association, vol. 73(4), pages 806-814, September.
    3. Roseta-Palma, Catarina & Monteiro, Henrique, 2008. "Pricing for Scarcity," MPRA Paper 10384, University Library of Munich, Germany.
    4. Simon Porcher, 2014. "Efficiency and equity in two-part tariffs: the case of residential water rates," Applied Economics, Taylor & Francis Journals, vol. 46(5), pages 539-555, February.
    5. Hayne E. Leland & Robert A. Meyer, 1976. "Monopoly Pricing Structures with Imperfect Discrimination," Bell Journal of Economics, The RAND Corporation, vol. 7(2), pages 449-462, Autumn.
    6. Olmstead, Sheila M., 2009. "Reduced-Form Versus Structural Models of Water Demand Under Nonlinear Prices," Journal of Business & Economic Statistics, American Statistical Association, vol. 27, pages 84-94.
    7. Jean-Paul Chavas & Walter Briec, 2012. "On economic efficiency under non-convexity," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 50(3), pages 671-701, August.
    8. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
    9. Moffitt, Robert, 1986. "The Econometrics of Piecewise-Linear Budget Constraints: A Survey and Exposition of the Maximum Likelihood Method," Journal of Business & Economic Statistics, American Statistical Association, vol. 4(3), pages 317-328, July.
    10. Sibly, Hugh & Tooth, Richard, 2014. "The consequences of using increasing block tariffs to price urban water," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 58(2), April.
    11. Baumol, William J & Bradford, David F, 1970. "Optimal Departures from Marginal Cost Pricing," American Economic Review, American Economic Association, vol. 60(3), pages 265-283, June.
    12. Olmstead, Sheila M. & Michael Hanemann, W. & Stavins, Robert N., 2007. "Water demand under alternative price structures," Journal of Environmental Economics and Management, Elsevier, vol. 54(2), pages 181-198, September.
    13. Maamar Sebri, 2014. "A meta-analysis of residential water demand studies," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 16(3), pages 499-520, June.
    14. Aaron Strong & V. Kerry Smith, 2010. "Reconsidering the Economics of Demand Analysis with Kinked Budget Constraints," Land Economics, University of Wisconsin Press, vol. 86(1), pages 173-190.
    15. Burtless, Gary & Hausman, Jerry A, 1978. "The Effect of Taxation on Labor Supply: Evaluating the Gary Negative Income Tax Experiments," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1103-1130, December.
    16. M. Barry Goldman & Hayne E. Leland & David S. Sibley, 1984. "Optimal Nonuniform Prices," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(2), pages 305-319.
    17. Julie A. Hewitt & W. Michael Hanemann, 1995. "A Discrete/Continuous Choice Approach to Residential Water Demand under Block Rate Pricing," Land Economics, University of Wisconsin Press, vol. 71(2), pages 173-192.
    18. Steven Renzetti, 1999. "Municipal Water Supply and Sewage Treatment: Costs, Prices and Distortions," Canadian Journal of Economics, Canadian Economics Association, vol. 32(3), pages 688-704, May.
    19. Renzetti, Steven, 1992. "Evaluating the welfare effects of reforming municipal water prices," Journal of Environmental Economics and Management, Elsevier, vol. 22(2), pages 147-163, March.
    20. Moffitt, Robert, 1990. "The Econometrics of Kinked Budget Constraints," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 119-139, Spring.
    21. Ellen M. Pint, 1999. "Household Responses to Increased Water Rates during the California Drought," Land Economics, University of Wisconsin Press, vol. 75(2), pages 246-266.
    22. Jeffrey M. Wooldridge, 2015. "Control Function Methods in Applied Econometrics," Journal of Human Resources, University of Wisconsin Press, vol. 50(2), pages 420-445.
    23. John A. Nordin, 1976. "A Proposed Modification of Taylor's Demand Analysis: Comment," Bell Journal of Economics, The RAND Corporation, vol. 7(2), pages 719-721, Autumn.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Zekri, Slim, 2023. "Teaching Water Economics in a Desert Environment," Applied Economics Teaching Resources (AETR), Agricultural and Applied Economics Association, vol. 5(2), April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Baerenklau, Kenneth A., 2015. "Theoretically consistent welfare estimation under block pricing: the case of water demand," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 205723, Agricultural and Applied Economics Association.
    2. Henrique Monteiro, 2010. "Residential Water Demand in Portugal: checking for efficiency-based justifications for increasing block tariffs," Working Papers Series 1 ercwp0110, ISCTE-IUL, Business Research Unit (BRU-IUL).
    3. Darío F. Jiménez & Sergio A. Orrego & Felipe A. Vásquez & Roberto D. Ponce, 2017. "Estimating water demand for urban residential use using a discrete-continuous model and disaggregated data at the household level: the case of the city of Manizales, Colombia," Lecturas de Economía, Universidad de Antioquia, Departamento de Economía, issue 86, pages 153-178, Enero - J.
    4. Jiménez, Darío F. & Orrego, Sergio A. & Vásquez, Felipe A. & Ponce, Roberto D., 2016. "Estimación de la demanda de agua para uso residencial urbano usando un modelo discreto-continuo y datos desagregados a nivel de hogar: el caso de la ciudad de Manizales, Colombia," Revista Lecturas de Economía, Universidad de Antioquia, CIE, issue 86, pages 153-178, December.
    5. Mónica Maldonado-Devis & Vicent Almenar-Llongo, 2021. "A Panel Data Estimation of Domestic Water Demand with IRT Tariff Structure: The Case of the City of Valencia (Spain)," Sustainability, MDPI, vol. 13(3), pages 1-26, January.
    6. Mansur, Erin T. & Olmstead, Sheila M., 2012. "The value of scarce water: Measuring the inefficiency of municipal regulations," Journal of Urban Economics, Elsevier, vol. 71(3), pages 332-346.
    7. Baerenklau, Kenneth A. & Schwabe, Kurt & Dinar, Ariel, 2014. "Do Increasing Block Rate Water Budgets Reduce Residential Water Demand? A Case Study in Southern California," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 170019, Agricultural and Applied Economics Association.
    8. Tomas Havranek & Zuzana Irsova & Tomas Vlach, 2018. "Measuring the Income Elasticity of Water Demand: The Importance of Publication and Endogeneity Biases," Land Economics, University of Wisconsin Press, vol. 94(2), pages 259-283.
    9. Wang, Xiangrui & Lee, Jukwan & Yan, Jia & Thompson, Gary D., 2017. "Modeling Rational But Inattentive Consumer’s Residential Water Demand," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 258555, Agricultural and Applied Economics Association.
    10. Olmstead, Sheila M. & Michael Hanemann, W. & Stavins, Robert N., 2007. "Water demand under alternative price structures," Journal of Environmental Economics and Management, Elsevier, vol. 54(2), pages 181-198, September.
    11. Kenneth A. Baerenklau & Kurt A. Schwabe & Ariel Dinar, 2014. "The Residential Water Demand Effect of Increasing Block Rate Water Budgets," Land Economics, University of Wisconsin Press, vol. 90(4), pages 683-699.
    12. Aaron Strong & V. Kerry Smith, 2010. "Reconsidering the Economics of Demand Analysis with Kinked Budget Constraints," Land Economics, University of Wisconsin Press, vol. 86(1), pages 173-190.
    13. Diakité, Daouda & Semenov, Aggey & Thomas, Alban, 2009. "A proposal for social pricing of water supply in Côte d'Ivoire," Journal of Development Economics, Elsevier, vol. 88(2), pages 258-268, March.
    14. Stavins, Robert & Hanemann, W. Michael & Olmstead, Sheila, 2005. "Do Consumers React to the Shape of Supply? Water Demand under Heterogeneous Price Structures," RFF Working Paper Series dp-05-29, Resources for the Future.
    15. DIAKITE Daouda & SEMENOV Aggey & THOMAS Alban, 2006. "Social Pricing and Water Provision in Côte d'Ivoire," LERNA Working Papers 06.14.207, LERNA, University of Toulouse.
    16. Arbues, Fernando & Garcia-Valinas, Maria Angeles & Martinez-Espineira, Roberto, 2003. "Estimation of residential water demand: a state-of-the-art review," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 32(1), pages 81-102, March.
    17. Zhang, Zibin & Cai, Wenxin & Feng, Xiangzhao, 2017. "How do urban households in China respond to increasing block pricing in electricity? Evidence from a fuzzy regression discontinuity approach," Energy Policy, Elsevier, vol. 105(C), pages 161-172.
    18. Sheila M. Olmstead, 2010. "The Economics of Managing Scarce Water Resources," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 4(2), pages 179-198, Summer.
    19. Milan Ščasný & Šarlota Smutná, 2021. "Estimation of price and income elasticity of residential water demand in the Czech Republic over three decades," Journal of Consumer Affairs, Wiley Blackwell, vol. 55(2), pages 580-608, June.
    20. Brandli Stitzel & Cynthia L. Rogers, 2022. "Residential Water Demand Under Increasing Block Rate Structure: Conservation Conundrum?," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 36(1), pages 203-218, January.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:wepxxx:v:05:y:2019:i:02:n:s2382624x18500145. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscinet.com/wep/wep.shtml .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.