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Optimal water tariffs for domestic, agricultural and industrial use

Author

Listed:
  • Andrea Caravaggio

    (University of Siena)

  • Luigi De Cesare

    (University of Foggia)

  • Andrea Di Liddo

    (University of Foggia)

Abstract

Consider a water supplier who determines sales rates with the goals of maximizing profits, protecting consumer welfare, and ensuring adequate future water supplies. Buyers are differentiated and can use the water for domestic, agricultural, and industrial purposes. We propose a leader-follower finite-horizon differential game. The leader (the water supplier) determines the selling price and the followers (consumers) react by requesting their optimal amount of water. We calculate a feedback Stackelberg equilibrium assuming that all user demand is satisfied (interior equilibrium). We compare two different tariff schemes: linear tariffs (the price paid is a multiple of the volume of water purchased), and increasing block tariffs (the unit price is lower for quantities of water that do not exceed a fixed threshold). We show that block pricing is never optimal and linear pricing is always preferred.

Suggested Citation

  • Andrea Caravaggio & Luigi De Cesare & Andrea Di Liddo, 2024. "Optimal water tariffs for domestic, agricultural and industrial use," Annals of Operations Research, Springer, vol. 337(3), pages 1135-1165, June.
    • Handle: RePEc:spr:annopr:v:337:y:2024:i:3:d:10.1007_s10479-024-05822-y
    DOI: 10.1007/s10479-024-05822-y
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    More about this item

    Keywords

    Water pricing; Block tariffs; Differential games; Stackelberg equilibrium; Corner solutions;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water

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