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The consequences of using increasing block tariffs to price urban water

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  • Hugh Sibly
  • Richard Tooth

Abstract

type="main" xml:id="ajar12032-abs-0001"> Increasing block tariffs (IBTs) are currently used to price urban water in many Australian mainland capitals and a great many cities worldwide. This paper provides a systematic analysis of the impact of the adoption of IBTs to price urban water under the common constraints of scarce supply and cost recovery. The key tools available to policymakers using IBTs are the volumetric rate in the low tier and the threshold level of that tier. This paper shows how variations in these tools influence (i) the fixed charge set by the firm, (ii) the deadweight loss from the IBT and (iii) the bill paid by customers for particular levels of demand. Our analysis suggests that IBTs are neither fair nor efficient. We propose a modification to IBTs that, while retaining their perception of fairness, results in the efficient allocation of urban water.

Suggested Citation

  • Hugh Sibly & Richard Tooth, 2014. "The consequences of using increasing block tariffs to price urban water," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 58(2), pages 223-243, April.
  • Handle: RePEc:bla:ajarec:v:58:y:2014:i:2:p:223-243
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    File URL: http://hdl.handle.net/10.1111/ajar.2014.58.issue-2
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    References listed on IDEAS

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    1. Hugh Sibly & Richard Tooth, 2008. "Bringing competition to urban water supply ," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 52(3), pages 217-233, September.
    2. R. Quentin Grafton & Michael B. Ward, 2008. "Prices versus Rationing: Marshallian Surplus and Mandatory Water Restrictions," The Economic Record, The Economic Society of Australia, vol. 84(s1), pages 57-65, September.
    3. 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).
    4. Hugh Sibly, 2006. "Efficient Urban Water Pricing," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 39(2), pages 227-237, June.
    5. M. Barry Goldman & Hayne E. Leland & David S. Sibley, 1984. "Optimal Nonuniform Prices," Review of Economic Studies, Oxford University Press, vol. 51(2), pages 305-319.
    6. Roseta-Palma, Catarina & Monteiro, Henrique, 2008. "Pricing for Scarcity," MPRA Paper 10384, University Library of Munich, Germany.
    7. J. Elnaboulsi, 2001. "Nonlinear Pricing and Capacity Planning for Water and Wastewater Services," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 15(1), pages 55-69, February.
    8. Brown,Stephen J. & Sibley,David Sumner, 1986. "The Theory of Public Utility Pricing," Cambridge Books, Cambridge University Press, number 9780521314008, May.
    9. 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.
    10. Geoff Edwards, 2006. "Whose Values Count? Demand Management for Melbourne's Water," The Economic Record, The Economic Society of Australia, vol. 82(s1), pages 54-63, September.
    11. Jihad Elnaboulsi, 2001. "Nonlinear pricing and capacity planning for water and wastewater services," Post-Print hal-00447925, HAL.
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    Cited by:

    1. Molinos-Senante, MarĂ­a & Donoso, Guillermo, 2016. "Water scarcity and affordability in urban water pricing: A case study of Chile," Utilities Policy, Elsevier, vol. 43(PA), pages 107-116.

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