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Measuring the Dynamic Efficiency Costs of Regulators' Preferences: Municipal Water Utilities in the Arid West

  • Christopher Timmins


    (Department of Economics, Yale University, P. O. Box 208264, New Haven, CT 06520-8264, U.S.A.)

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    Evidence suggests that municipal water utility administrators in the western US price water significantly below its marginal cost and, in so doing, inefficiently exploit aquifer stocks and induce social surplus losses. This paper empirically identifies the objective function of those managers, measures the deadweight losses resulting from their price-discounting decisions, and recovers the efficient water pricing policy function from counterfactual experiments. In doing so, the estimation uses a "continuous-but-constrained- control" version of a nested fixed-point algorithm in order to measure the important intertemporal consequences of groundwater pricing decisions. Copyright The Econometric Society 2002.

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    Article provided by Econometric Society in its journal Econometrica.

    Volume (Year): 70 (2002)
    Issue (Month): 2 (March)
    Pages: 603-629

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    Handle: RePEc:ecm:emetrp:v:70:y:2002:i:2:p:603-629
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    1. Renzetti, Steven, 1992. "Evaluating the welfare effects of reforming municipal water prices," Journal of Environmental Economics and Management, Elsevier, vol. 22(2), pages 147-163, March.
    2. Oscar R. Burt, 1964. "Optimal Resource Use Over Time with an Application to Ground Water," Management Science, INFORMS, vol. 11(1), pages 80-93, September.
    3. R. Bruce Billings, 1982. "Specification of Block Rate Price Variables in Demand Models," Land Economics, University of Wisconsin Press, vol. 58(3), pages 386-394.
    4. Knapp Keith C. & Olson Lars J., 1995. "The Economics of Conjunctive Groundwater Management with Stochastic Surface Supplies," Journal of Environmental Economics and Management, Elsevier, vol. 28(3), pages 340-356, May.
    5. Swallow, Stephen K. & Marin, Carlos M., 1988. "Long run price inflexibility and efficiency loss for municipal water supply," Journal of Environmental Economics and Management, Elsevier, vol. 15(2), pages 233-247, June.
    6. Christopher Timmins, 2003. "Demand-Side Technology Standards Under Inefficient Pricing Regimes," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 26(1), pages 107-124, September.
    7. Feigenbaum, Susan & Teeples, Ronald, 1983. "Public versus Private Water Delivery: A Hedonic Cost Approach," The Review of Economics and Statistics, MIT Press, vol. 65(4), pages 672-78, November.
    8. Peltzman, Sam, 1971. "Pricing in Public and Private Enterprises: Electric Utilities in the United States," Journal of Law and Economics, University of Chicago Press, vol. 14(1), pages 109-47, April.
    9. John L. Mikesell & Patrick C. Mann, 1976. "Pricing by Rural Electric Cooperatives," Land Economics, University of Wisconsin Press, vol. 52(1), pages 96-102.
    10. Baron, David P & Myerson, Roger B, 1982. "Regulating a Monopolist with Unknown Costs," Econometrica, Econometric Society, vol. 50(4), pages 911-30, July.
    11. Rust, J., 1991. "Estimation of dynamic Structural Models: Problems and Prospects Part I : Discrete Decision Processes," Working papers 9106, Wisconsin Madison - Social Systems.
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