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Block Rate Pricing of Water in Indonesia: An Analysis of Welfare Effects

  • Piet Rietveld
  • Jan Rouwendal
  • Bert Zwart

Block rate pricing of piped water in Indonesian cities has a progressive structure: the marginal price paid increases with the volume of demand. This paper estimates household water demand in Salatiga city using the Burtless and Hausman model, and finds that its distribution is not unimodal—that data cluster around kinks. The main estimation results are a price elasticity of approximately-1.2 and an income elasticity of 0.05. These elasticities are mutually dependent. The estimated model is used to investigate the social welfare consequences of a shift to uniform pricing. The principal beneficiaries would be large households, which are not necessarily wealthy. While replacing the complex rate structure by a uniform marginal price would have positive effects on average welfare, the equity consequences would be small. To improve equity, water companies could reduce installation fees, giving low-income households access to water connections, or reinvest profits in network expansion to unserviced areas.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/00074910012331338983
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Article provided by Taylor & Francis Journals in its journal Bulletin of Indonesian Economic Studies.

Volume (Year): 36 (2000)
Issue (Month): 3 ()
Pages: 73-92

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Handle: RePEc:taf:bindes:v:36:y:2000:i:3:p:73-92
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  1. G. Burtless & J. A. Hausman, 1977. "The Effect of Taxation on Labor Supply: Evaluating the Gary Negative Income Tax Experiment," Working papers 211, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Moffitt, Robert, 1990. "The Econometrics of Kinked Budget Constraints," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 119-39, Spring.
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