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Pricing for Scarcity

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  • Roseta-Palma, Catarina
  • Monteiro, Henrique

Abstract

In many areas where water is not abundant, water pricing schedules contain significant nonlinearities. Existing pricing literature establishes that efficient schedules will depend on demand and supply characteristics. However, most empirical studies show that actual pricing schemes have little to do with theoretical efficiency results. In particular, there are very few models recommending increasing blocks, whereas we present evidence that this type of tariff structure is abundantly used. Water managers often defend increasing blocks, both as a means to benefit smaller users and as a way to signal scarcity. Naturally, in the presence of water scarcity the true cost of water increases due to the emergence of a scarcity cost. In this paper, we incorporate the scarcity cost associated with insufficient water availability into the optimal tariff design in several different models. We show that when both demand and costs respond to climate factors, increasing marginal prices may come about as a combined result of scarcity and customer heterogeneity under specific conditions. We also investigate the effect that rising water scarcity in the long run can have on the steady-state amount of capital invested in water storage and supply infrastructures and obtain some results that are consistent with the static models.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 10384.

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Date of creation: Jun 2008
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Handle: RePEc:pra:mprapa:10384

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Related research

Keywords: water pricing; nonlinear pricing; increasing block tariffs; water scarcity;

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References

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  1. Monteiro, Henrique & Roseta-Palma, Catarina, 2007. "Caracterização dos tarifários de abastecimento de água e saneamento em Portugal
    [Portuguese Water Supply and Sewage Tariffs Report]
    ," MPRA Paper 4238, University Library of Munich, Germany.
  2. Schuck, Eric C. & Green, Gareth P., 2002. "Supply-based water pricing in a conjunctive use system: implications for resource and energy use," Resource and Energy Economics, Elsevier, vol. 24(3), pages 175-192, June.
  3. Wilson, Robert, 1997. "Nonlinear Pricing," OUP Catalogue, Oxford University Press, number 9780195115826.
  4. Brown,Stephen J. & Sibley,David Sumner, 1986. "The Theory of Public Utility Pricing," Cambridge Books, Cambridge University Press, number 9780521314008, October.
  5. J. Elnaboulsi, 2001. "Nonlinear Pricing and Capacity Planning for Water and Wastewater Services," Water Resources Management, Springer, vol. 15(1), pages 55-69, February.
  6. Mark Hoffmann & Andrew Worthington & Helen Higgs, 2006. "Urban water demand with fixed volumetric charging in a large municipality: the case of Brisbane, Australia ," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 50(3), pages 347-359, 09.
  7. Anne Briand, 2006. "Marginal Cost Versus Average Cost Pricing with Climatic Shocks in Senegal: A Dynamic Computable General Equilibrium Model Applied to Water," Working Papers 2006.144, Fondazione Eni Enrico Mattei.
  8. Henrique Monteiro, 2005. "Water Pricing Models: a survey," Others 0510002, EconWPA.
  9. James E. T. Moncur & Richard L. Pollock, 1988. "Scarcity Rents for Water: A Valuation and Pricing Model," Land Economics, University of Wisconsin Press, vol. 64(1), pages 62-72.
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Citations

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Cited by:
  1. Sidibé, Amadou, 2010. "Demand for soil, water and forest conservation in Burkina Faso," Department of Forest Economics publications 2345, Swedish University of Agricultural Sciences, Department of forest economics.
  2. Robert W. Adler, 2010. "Drought, Sustainability, and the Law," Sustainability, MDPI, Open Access Journal, vol. 2(7), pages 2176-2196, July.
  3. Fullerton, Thomas M., Jr. & White, Katherine & Smith, Wm. Doyle & Walke, Adam G., 2012. "An Empirical Analysis of Halifax Municipal Water Consumption," MPRA Paper 54113, University Library of Munich, Germany, revised 14 Mar 2013.
  4. Rita Martins & Carlota Quintal & Ana Pimentel, 2009. "Equidade: a chave para explicar os tarifários de água em Portugal?," Notas Económicas, Faculdade de Economia, Universidade de Coimbra, issue 29, pages 41-53, June.
  5. Yerushalmi, Erez, 2012. "Measuring the administrative water allocation mechanism and agricultural amenities," The Warwick Economics Research Paper Series (TWERPS) 992, University of Warwick, Department of Economics.
  6. 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).
  7. Rita Martins & Carlota Quintal & Eduardo Barata & Luís Cruz, 2010. "Water Pricing and Social Equity in Portuguese Municipalities," GEMF Working Papers 2010-17, GEMF - Faculdade de Economia, Universidade de Coimbra.

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