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

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  • Piet Rietveld
  • Jan Rouwendal
  • Bert Zwart

Abstract

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.

Suggested Citation

  • Piet Rietveld & Jan Rouwendal & Bert Zwart, 2000. "Block Rate Pricing of Water in Indonesia: An Analysis of Welfare Effects," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 36(3), pages 73-92.
  • Handle: RePEc:taf:bindes:v:36:y:2000:i:3:p:73-92 DOI: 10.1080/00074910012331338983
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    References listed on IDEAS

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    1. Diamond, P. A. & Mirrlees, J. A., 1978. "A model of social insurance with variable retirement," Journal of Public Economics, Elsevier, pages 295-336.
    2. Burtless, Gary & Hausman, Jerry A, 1978. "The Effect of Taxation on Labor Supply: Evaluating the Gary Negative Income Tax Experiments," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1103-1130, December.
    3. Moffitt, Robert, 1990. "The Econometrics of Kinked Budget Constraints," Journal of Economic Perspectives, American Economic Association, pages 119-139.
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    Cited by:

    1. repec:ipg:wpaper:2014-484 is not listed on IDEAS
    2. Koji Miyawaki & Yasuhiro Omori & Akira Hibiki, 2011. "Panel Data Analysis Of Japanese Residential Water Demand Using A Discrete/Continuous Choice Approach," The Japanese Economic Review, Japanese Economic Association, vol. 62(3), pages 365-386, September.
    3. Diego Maria André & José Carvalho, 2014. "Spatial Determinants of Urban Residential Water Demand in Fortaleza, Brazil," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 28(9), pages 2401-2414, July.
    4. Olmstead, Sheila M. & Michael Hanemann, W. & Stavins, Robert N., 2007. "Water demand under alternative price structures," Journal of Environmental Economics and Management, Elsevier, vol. 54(2), pages 181-198, September.
    5. 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).
    6. Mvangeli Dlamini, Nqobizwe, 2015. "Households' Water Use Demand and Willingness to Pay for Improved Water Services: A Case Study of Semi-Urban Areas in the Lubombo and Lowveld Regions of Swaziland," Research Theses 243464, Collaborative Masters Program in Agricultural and Applied Economics.
    7. van den Bergh, Jeroen C.J.M., 2008. "Environmental regulation of households: An empirical review of economic and psychological factors," Ecological Economics, Elsevier, vol. 66(4), pages 559-574, July.
    8. Dinusha Dharmaratna & Edwyna Harris, 2010. "Estimating Residential Water Demand using the Stone-Geary Functional Form: the Case of Sri Lanka," Monash Economics Working Papers 46-10, Monash University, Department of Economics.
    9. Dinusha Dharmaratna & Edwyna Harris, 2012. "Estimating Residential Water Demand Using the Stone-Geary Functional Form: The Case of Sri Lanka," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 26(8), pages 2283-2299, June.
    10. Céline Nauges & Dale Whittington, 2010. "Estimation of Water Demand in Developing Countries: An Overview," World Bank Research Observer, World Bank Group, pages 263-294.
    11. Hoffmann, Mark & Worthington, Andrew & Higgs, Helen, 2006. "Urban water demand with fixed volumetric charging in a large municipality: the case of Brisbane, Australia," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 50(3), September.
    12. Martins, Rita & Quintal, Carlota & Cruz, Luís & Barata, Eduardo, 2016. "Water affordability issues in developed countries – The relevance of micro approaches," Utilities Policy, Elsevier, vol. 43(PA), pages 117-123.
    13. Mansur, Erin T. & Olmstead, Sheila M., 2012. "The value of scarce water: Measuring the inefficiency of municipal regulations," Journal of Urban Economics, Elsevier, vol. 71(3), pages 332-346.
    14. Worthington, Andrew C., 2010. "Commercial and Industrial Water Demand Estimation: Theoretical and Methodological Guidelines for Applied Economics Research/Estimación de la demanda de agua comercial e industrial: pautas teóricas y m," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 28, pages 237-258, Agosto.
    15. Ruijs, A. & Zimmermann, A. & van den Berg, M., 2008. "Demand and distributional effects of water pricing policies," Ecological Economics, Elsevier, vol. 66(2-3), pages 506-516, June.
    16. Arjan Ruijs, 2007. "Welfare and Distribution Effects of Water Pricing Policies," Working Papers 2007.92, Fondazione Eni Enrico Mattei.
    17. Lehmann, Paul, 2011. "Making water affordable to all: A typology and evaluation of options for urban water pricing," UFZ Discussion Papers 10/2011, Helmholtz Centre for Environmental Research (UFZ), Division of Social Sciences (ÖKUS).
    18. Kertous, Mourad & Zerzour, Sahad, 2015. "To pay or not to pay? Water bill and delay in payment in Bejaia (Algeria): A duration analysis," MPRA Paper 67801, University Library of Munich, Germany.
    19. Xunzhou Ma & Shiqiu Zhang & Quan Mu, 2014. "How Do Residents Respond to Price under Increasing Block Tariffs? Evidence from Experiments in Urban Residential Water Demand in Beijing," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 28(14), pages 4895-4909, November.
    20. Arjan Ruijs, 2009. "Welfare and Distribution Effects of Water Pricing Policies," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, pages 161-182.
    21. Darío F. Jiménez & Sergio A. Orrego & Felipe A. Vásquez & Roberto D. Ponce, 2017. "Estimating water demand for urban residential use using a discrete-continuous model and disaggregated data at the household level: the case of the city of Manizales, Colombia," Lecturas de Economía, Universidad de Antioquia, Departamento de Economía, pages 153-178.
    22. Zhang, Zibin & Cai, Wenxin & Feng, Xiangzhao, 2017. "How do urban households in China respond to increasing block pricing in electricity? Evidence from a fuzzy regression discontinuity approach," Energy Policy, Elsevier, vol. 105(C), pages 161-172.
    23. Ramón Barberán & Fernando Arbués, 2009. "Equity in Domestic Water Rates Design," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 23(10), pages 2101-2118, August.
    24. Clemens Heuson & Wolfgang Peters & Reimund Schwarze & Anna-Katharina Topp, 2015. "Investment and Adaptation as Commitment Devices in Climate Politics," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 62(4), pages 769-790, December.
    25. Jiménez, Darío F. & Orrego, Sergio A. & Vásquez, Felipe A. & Ponce, Roberto D., 2016. "Estimación de la demanda de agua para uso residencial urbano usando un modelo discreto-continuo y datos desagregados a nivel de hogar: el caso de la ciudad de Manizales, Colombia," REVISTA LECTURAS DE ECONOMÍA, UNIVERSIDAD DE ANTIOQUIA - CIE, issue 86, pages 153-178, December.

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