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The welfare economics of optional water metering with asymmetric information

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  • Simon Cowan

Abstract

The paper develops a model of decentralized metering decisions when selective metering is socially optimal. Households choose between two-part tariffs. Decentralization achieves social efficiency when the regulator, who knows household characteristics, gives household-specific compensation (via a reduction in the lump-sum charge on choosing to have a meter), while allowing for the cost of metering. Relative to the status quo of no metering the full-information scheme provides a Pareto improvement. With asymmetric information the first-best allocation of meters can be achieved when only small consumers should have meters. When large consumers alone should be metered it is not possible to separate customers. An exogenous signal that is highly correlated with the unknown type can, however, help to alleviate this problem. The policy of requiring meters to be provided free is problematic because the first-best allocation does not enable all the water supplier`s costs to be recovered.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 273.

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Date of creation: 01 Aug 2006
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Handle: RePEc:oxf:wpaper:273

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Keywords: Water Metering; Optional; Two-part Tariffs; Asymmetric Information;

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  1. Armstrong, M. & Doyle, C. & Vickers, J., 1995. "The access pricing problem: a synthesis," Discussion Paper Series In Economics And Econometrics 9532, Economics Division, School of Social Sciences, University of Southampton.
  2. Erin T. Mansur & Sheila M. Olmstead, 2007. "The Value of Scarce Water: Measuring the Inefficiency of Municipal Regulations," NBER Working Papers 13513, National Bureau of Economic Research, Inc.
  3. Andrés Chambouleyron, 2002. "An Incentive Mechanism for Decentralized Water Metering Decisions," Industrial Organization 0206001, EconWPA, revised 01 Nov 2002.
  4. Rajah, N & Smith, S, 1993. "Distributional effects of household water charges," Fiscal Studies, Institute for Fiscal Studies, vol. 14(3), pages 86-108, August.
  5. Barrett, R. & Sinclair, P., 1999. "Water Charges and the Cost of Metering," Discussion Papers 99-05, Department of Economics, University of Birmingham.
  6. Guesnerie, Roger & Laffont, Jean-Jacques, 1984. "A complete solution to a class of principal-agent problems with an application to the control of a self-managed firm," Journal of Public Economics, Elsevier, vol. 25(3), pages 329-369, December.
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