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Optimal Pricing of Water: Optimal Departures from the Inverse Elasticity Rule

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  • Sağlam, Yiğit

Abstract

I 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.

Suggested Citation

  • Sağlam, Yiğit, 2011. "Optimal Pricing of Water: Optimal Departures from the Inverse Elasticity Rule," Working Paper Series 18553, Victoria University of Wellington, School of Economics and Finance.
    • Handle: RePEc:vuw:vuwecf:18553
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    File URL: https://ir.wgtn.ac.nz/handle/123456789/18553
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    1. Iglesias, Eva & Garrido, Alberto & Gomez-Ramos, Almudena, 2007. "Economic drought management index to evaluate water institutions' performance under uncertainty," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 51(1), pages 1-22.
    2. Eva Iglesias & Alberto Garrido & Almudena Gómez-Ramos, 2007. "Economic drought management index to evaluate water institutions' performance under uncertainty ," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 51(1), pages 17-38, March.
    3. Appels, David & Douglas, Robert A. & Dwyer, Gavan, 2004. "Responsiveness of Demand for Irrigation Water: A Focus on the Southern Murray-Darling Basin," Staff Working Papers 31924, Productivity Commission.
    4. 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.
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    Keywords

    water; model; optimal; pricing;
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