Optimal Pricing of Water: Optimal Departures from the Inverse Elasticity Rule
AbstractI consider the problem of water usage, developing a model to analyze the optimal pricing of water within a second-best economy. Consumers are assumed to have two main needs for water|drinking and non-drinking. Water is also used to produce food: The agricultural sector has a derived demand for water. As a water supplier, the local government may price discriminate across consumers and farmers. I introduce the second-best pricing scheme, derive conditions for the marginal-cost pricing and inverse-elasticity rules to apply, and analyze when it is optimal for the government to optimally deviate from these two pricing schemes.
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Bibliographic InfoPaper provided by Victoria University of Wellington, School of Economics and Finance in its series Working Paper Series with number 1533.
Date of creation: 2011
Date of revision:
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water; model; optimal; pricing;
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- Baumol, William J & Bradford, David F, 1970. "Optimal Departures from Marginal Cost Pricing," American Economic Review, American Economic Association, vol. 60(3), pages 265-83, June.
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