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Increasing Block Tariffs in the Water Sector – An Interpretation in Terms of Social Preferences

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  • Meran Georg

    (Berlin University of Technology, Berlin, Germany)

  • von Hirschhausen Christian

    (Berlin University of Technology (TU Berlin), and German Institute for Economic Research (DIW Berlin), Berlin, Germany)

Abstract

Many developing countries around the world apply progressive water tariffs, often structured in the form of discretely increasing block tariffs (IBTs). These tariffs have been criticized in the welfare economic literature due to their perceived inefficiency: many of the prices charged under IBTs do not correspond to marginal costs and thus violate the principle of allocative efficiency. In this paper we explore an alternative interpretation of the widespread use of IBTs, in terms of social preferences and fairness considerations. For this, we rely on an extension of the Fehr, E., and K. Schmidt (1999. “A Theory of Fairness, Competition, and Cooperation.” Quarterly Journal of Economics 114: 817–868.) utility function, including inequality aversion, to which we add another parameter representing a reference for redistribution which reflects a societal preference to correct for income difference perceived as unfair. Additionally, the model includes a variable on household size, finding that, as poor households are on average larger, a simple IBT tariff disregarding household size may not be “fair”.

Suggested Citation

  • Meran Georg & von Hirschhausen Christian, 2017. "Increasing Block Tariffs in the Water Sector – An Interpretation in Terms of Social Preferences," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 17(3), pages 1-24, July.
  • Handle: RePEc:bpj:bejeap:v:17:y:2017:i:3:p:24:n:2
    DOI: 10.1515/bejeap-2016-0079
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    1. Lucie Gadenne, 2020. "Can Rationing Increase Welfare? Theory and an Application to India's Ration Shop System," American Economic Journal: Economic Policy, American Economic Association, vol. 12(4), pages 144-177, November.
    2. Gong, Chengzhu & Yu, Shiwei & Zhu, Kejun & Hailu, Atakelty, 2016. "Evaluating the influence of increasing block tariffs in residential gas sector using agent-based computational economics," Energy Policy, Elsevier, vol. 92(C), pages 334-347.

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    More about this item

    Keywords

    water; tariffication; prices; fairness; distribution; institutions;
    All these keywords.

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General

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