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Policy Note: "Short-term Pain for Long-term Gain: Urban Water Pricing and the Risk-adjusted User Cost"

Author

Listed:
  • Long Chu

    (Crawford School of Public Policy (Building 132), The Australian National University, ACT 2601, Australia)

  • R. Quentin Grafton

    (Crawford School of Public Policy (Building 132), The Australian National University, ACT 2601, Australia)

Abstract

The paper introduces the concept of the risk-adjusted user cost (RAUC) and its application to the volumetric price charged to water consumers. It is a risk premium that would be incorporated into and be a component of a dynamic pricing framework. The benefit of the RAUC is that it allows decision-makers to inter-temporally maximize social welfare when the future water supply is uncertain. The RAUC imposes higher volumetric prices today to promote water conservation and, thus, mitigate the possibility of future water restrictions. An application of how the RAUC can be estimated is provided based on data from the Australian Capital Territory, Australia. Key policy implications in relation to the RAUC and dynamic water pricing are also presented.

Suggested Citation

  • Long Chu & R. Quentin Grafton, 2019. "Policy Note: "Short-term Pain for Long-term Gain: Urban Water Pricing and the Risk-adjusted User Cost"," Water Economics and Policy (WEP), World Scientific Publishing Co. Pte. Ltd., vol. 5(02), pages 1-14, April.
    • Handle: RePEc:wsi:wepxxx:v:05:y:2019:i:02:n:s2382624x18710054
    DOI: 10.1142/S2382624X18710054
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    References listed on IDEAS

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    1. R. Quentin Grafton & Tom Kompas, 2007. "Pricing Sydney water ," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 51(3), pages 227-241, September.
    2. Benveniste, L M & Scheinkman, J A, 1979. "On the Differentiability of the Value Function in Dynamic Models of Economics," Econometrica, Econometric Society, vol. 47(3), pages 727-732, May.
    3. Roseta-Palma, Catarina & Monteiro, Henrique, 2008. "Pricing for Scarcity," MPRA Paper 10384, University Library of Munich, Germany.
    4. Steven Renzetti, 2009. "Wave of the Future: The Case for Smarter Water," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 281, February.
    5. James E. T. Moncur & Richard L. Pollock, 1988. "Scarcity Rents for Water: A Valuation and Pricing Model," Land Economics, University of Wisconsin Press, vol. 64(1), pages 62-72.
    6. R. Quentin Grafton & Michael B. Ward, 2008. "Prices versus Rationing: Marshallian Surplus and Mandatory Water Restrictions," The Economic Record, The Economic Society of Australia, vol. 84(s1), pages 57-65, September.
    7. Steven Renzetti, 1999. "Municipal Water Supply and Sewage Treatment: Costs, Prices and Distortions," Canadian Journal of Economics, Canadian Economics Association, vol. 32(3), pages 688-704, May.
    8. Sheila M. Olmstead, 2010. "The Economics of Managing Scarce Water Resources," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 4(2), pages 179-198, Summer.
    9. Grafton, R. Quentin & Chu, Long & Kompas, Tom, 2015. "Optimal water tariffs and supply augmentation for cost-of-service regulated water utilities," Utilities Policy, Elsevier, vol. 34(C), pages 54-62.
    10. 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.
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    Cited by:

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    2. Taís Maria Nunes Carvalho & Francisco Souza Filho, 2021. "Variational Mode Decomposition Hybridized With Gradient Boost Regression for Seasonal Forecast of Residential Water Demand," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 35(10), pages 3431-3445, August.

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