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Residential Water Demand in Portugal: checking for efficiency-based justifications for increasing block tariffs

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  • Henrique Monteiro

    (ISCTE-IUL - Department of Economics and UNIDE-ERC)

Abstract

The increasing popularity of increasing block tariffs (IBT) for water is reflected in Portugal by a virtually universal implementation for residential use. IBT are often supported as a good tool for achieving the goals of equity, water conservation and revenue neutrality but seldom have they been grounded on efficiency justifications. We test the conditions derived by Roseta-Palma and Monteiro (2008) for IBT to be a second-best pricing practice under water scarcity and budget balancing constraints, when consumers are heterogeneous and the fixed charge is only allowed to cover fixed costs. Because, in these conditions, the choice of tariff schedule design is dependent on the price-elasticity of demand and the way it varies with consumption levels, we estimate the Portuguese residential water demand and show that the resulting recommended tariff schedule hinges crucially on the choice of functional form. After the proper specification test, a choice between a semilogarithmic lin-log and a double-log specifications is left undecided, which does not prove the superiority of IBT, but also does not enable its dismissal. Besides the usual determinants found in the prolific residential water demand estimation literature we find that the proportion of seasonally inhabited dwellings and a reduced water quality on delivery can have a significant negative influence on the amount of water households consume.

Suggested Citation

  • 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).
    • Handle: RePEc:isc:iscwp1:ercwp0110
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    1. Hugh Sibly & Richard Tooth, 2014. "The consequences of using increasing block tariffs to price urban water," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 58(2), pages 223-243, April.
    2. Liang Lu & David Deller & Morten Hviid, 2019. "Price and Behavioural Signals to Encourage Household Water Conservation: Implications for the UK," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 33(2), pages 475-491, January.
    3. David Roibas & Maria A. Garcia-Valiñas & Roberto Fernandez-Llera, 2019. "Measuring the Impact of Water Supply Interruptions on Household Welfare," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 73(1), pages 159-179, May.
    4. Mónica Maldonado-Devis & Vicent Almenar-Llongo, 2021. "A Panel Data Estimation of Domestic Water Demand with IRT Tariff Structure: The Case of the City of Valencia (Spain)," Sustainability, MDPI, vol. 13(3), pages 1-26, January.
    5. Liang Lu & David Deller & Morten Hviid, 2018. "Price and Behavioural Signals to Encourage Household Water Conservation in Temperate Climates," Working Paper series, University of East Anglia, Centre for Competition Policy (CCP) 2018-01, Centre for Competition Policy, University of East Anglia, Norwich, UK..

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    More about this item

    Keywords

    Water Pricing; Residential Water Demand; Increasing Block Tariffs; Choice of Functional Form; Water Quality;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • Q21 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Demand and Supply; Prices
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water

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