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The distributional incidence of residential water and electricity subsidies

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Author Info

  • Komives, Kristin
  • Halpern, Jonathan
  • Foster, Vivien
  • Wodon, Quentin
  • Abdullah, Roohi

Abstract

Subsidies to residential utility customers are popular among policymakers, utility managers, and utility customers alike, but they are nonetheless the subject of much controversy. Utility subsidies are seen as a way to help make utility service affordable for poor households and as an alternative mechanism for income redistribution. These arguments in favor of subsidies are countered by serious concerns about their adverse effects on consumer behavior, utility operations, and the financial health of utilities. Both the affordability and redistributive arguments for subsidies are based on the presumption that poor households benefit disproportionately from water and electricity subsidies, that they are well-targeted to the poor. The authors test this assumption by examining the extent to which the poor benefit from consumption and connection subsidies for water and electricity services. Their analysis of a wide range of subsidy models from around the developing world shows that the most common form of utility subsidy-quantity-based subsidies delivered through the tariff structure-are highly regressive. Geographically targeted or means-tested subsidies do better, and in many cases have a progressive incidence, but large numbers of poor households remain excluded. Low levels of coverage and metering severely limit the effectiveness of consumption subsidy schemes to reach the poor. Simulations suggest that connection subsidies are an attractive alternative for low coverage areas, but only if utilities have the means and motivation to extend network access to poor households and only if those households choose to connect.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3878.

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Date of creation: 01 Apr 2006
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Handle: RePEc:wbk:wbrwps:3878

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Related research

Keywords: Economic Theory&Research; Town Water Supply and Sanitation; Tax Law; Urban Water Supply and Sanitation; Energy Production and Transportation;

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References

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  1. repec:ebl:ecbull:v:9:y:2007:i:4:p:1-7 is not listed on IDEAS
  2. David Coady & Margaret Grosh & John Hoddinott, 2004. "Targeting of Transfers in Developing Countries : Review of Lessons and Experience," World Bank Publications, The World Bank, number 14902, October.
  3. Vivien Foster & Maria Caridad Araujo, 2004. "Does infrastructure reform work for the poor? A case study from Guatemala," Policy Research Working Paper Series 3185, The World Bank.
  4. Diego Angel-Urdinola & Quentin Wodon, 2007. "Do Utility Subsidies Reach the Poor? Framework and Evidence for Cape Verde, Sao Tome, and Rwanda," Economics Bulletin, AccessEcon, vol. 9(4), pages 1-7.
  5. Komives, Kristin, 1999. "Designing pro-poor water and sewer concessions : early lessons from Bolivia," Policy Research Working Paper Series 2243, The World Bank.
  6. Wodon, Quentin & Ajwad, Mohamed Ishan & Siaens, Corinne, 2003. "Lifeline or Means-Testing? Electric Utility Subsidies in Honduras," MPRA Paper 15419, University Library of Munich, Germany.
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Cited by:
  1. Monteiro, Henrique, 2008. "Evolution of cost recovery levels in the Portuguese water supply and wastewater industry 1998-2005," MPRA Paper 11490, University Library of Munich, Germany.
  2. Lehmann, Paul, 2011. "Making water affordable to all: A typology and evaluation of options for urban water pricing," UFZ Discussion Papers 10/2011, Helmholtz Centre for Environmental Research (UFZ), Division of Social Sciences (├ľKUS).
  3. Jorge Martinez-Vazquez, 2007. "Budget Policy and Income Distribution," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0707, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  4. Felgendreher, Simon & Lehmann, Paul, 2012. "The political economy of the peruvian urban water sector," UFZ Discussion Papers 18/2012, Helmholtz Centre for Environmental Research (UFZ), Division of Social Sciences (├ľKUS).

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