HKC03 - Leading a horse to water: Understanding the potential consequences of ordeals in subsidized tariff pricing

Water utilities attempting to balance widespread network access with financial stability in providing services often employ Increasing Block Tariffs (IBTs), where volumetric rates increase nonlinearly with water consumed. The widespread adoption of IBTs by utilities across the world is partly attributed to their ability to cross-subsidize smaller monthly users; however, this often leads to the undesirable outcome that large poor households are shifted into higher tariff blocks. To address this, water utilities often adopt a“social tariff”, with significantly lower rates specifically targeted at poor households. However, most of these social tariff policies require households to opt-in or apply to the program, introducing an additional “ordeal” friction on poor households that can limit its use. In this paper, we review the use of social tariffs in the context of ordeals and discuss its implications on efficiency, nonpayment, and welfare, particularly for water utilities in developing countries.