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Pricing for Scarcity

Author

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  • Roseta-Palma, Catarina
  • Monteiro, Henrique

Abstract

In many areas where water is not abundant, water pricing schedules contain significant nonlinearities. Existing pricing literature establishes that efficient schedules will depend on demand and supply characteristics. However, most empirical studies show that actual pricing schemes have little to do with theoretical efficiency results. In particular, there are very few models recommending increasing blocks, whereas we present evidence that this type of tariff structure is abundantly used. Water managers often defend increasing blocks, both as a means to benefit smaller users and as a way to signal scarcity. Naturally, in the presence of water scarcity the true cost of water increases due to the emergence of a scarcity cost. In this paper, we incorporate the scarcity cost associated with insufficient water availability into the optimal tariff design in several different models. We show that when both demand and costs respond to climate factors, increasing marginal prices may come about as a combined result of scarcity and customer heterogeneity under specific conditions. We also investigate the effect that rising water scarcity in the long run can have on the steady-state amount of capital invested in water storage and supply infrastructures and obtain some results that are consistent with the static models.

Suggested Citation

  • Roseta-Palma, Catarina & Monteiro, Henrique, 2008. "Pricing for Scarcity," MPRA Paper 10384, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:10384
    as

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    File URL: https://mpra.ub.uni-muenchen.de/10384/1/MPRA_paper_10384.pdf
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    References listed on IDEAS

    as
    1. Henrique Monteiro, 2005. "Water Pricing Models: a survey," Others 0510002, University Library of Munich, Germany.
    2. Brown,Stephen J. & Sibley,David Sumner, 1986. "The Theory of Public Utility Pricing," Cambridge Books, Cambridge University Press, number 9780521314008, December.
    3. Monteiro, Henrique & Roseta-Palma, Catarina, 2007. "Caracterização dos tarifários de abastecimento de água e saneamento em Portugal
      [Portuguese Water Supply and Sewage Tariffs Report]
      ," MPRA Paper 4238, University Library of Munich, Germany.
    4. 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.
    5. Mark Hoffmann & Andrew Worthington & Helen Higgs, 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), pages 347-359, September.
    6. Schuck, Eric C. & Green, Gareth P., 2002. "Supply-based water pricing in a conjunctive use system: implications for resource and energy use," Resource and Energy Economics, Elsevier, vol. 24(3), pages 175-192, June.
    7. Anne Briand, 2006. "Marginal Cost Versus Average Cost Pricing with Climatic Shocks in Senegal: A Dynamic Computable General Equilibrium Model Applied to Water," Working Papers 2006.144, Fondazione Eni Enrico Mattei.
    8. Briand, Anne, 2006. "Marginal Cost Versus Average Cost Pricing with Climatic Shocks in Senegal: Dynamic Computable General Equilibrium Model Applied to Water," Climate Change Modelling and Policy Working Papers 12028, Fondazione Eni Enrico Mattei (FEEM).
    9. Jihad Elnaboulsi, 2001. "Nonlinear pricing and capacity planning for water and wastewater services," Post-Print hal-00447925, HAL.
    10. J. Elnaboulsi, 2001. "Nonlinear Pricing and Capacity Planning for Water and Wastewater Services," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 15(1), pages 55-69, February.
    11. Wilson, Robert, 1997. "Nonlinear Pricing," OUP Catalogue, Oxford University Press, number 9780195115826.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Sidibé, Amadou, 2010. "Demand for soil, water and forest conservation in Burkina Faso," Department of Forest Economics publications 2345, Swedish University of Agricultural Sciences, Department of forest economics.
    2. 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).
    3. Robert W. Adler, 2010. "Drought, Sustainability, and the Law," Sustainability, MDPI, Open Access Journal, vol. 2(7), pages 1-21, July.
    4. 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.
    5. Li, Yao & Fan, Jin & Zhao, Dingtao & Wu, Yanrui & Li, Jun, 2016. "Tiered gasoline pricing: A personal carbon trading perspective," Energy Policy, Elsevier, vol. 89(C), pages 194-201.
    6. Yerushalmi, Erez, 2012. "Measuring the administrative water allocation mechanism and agricultural amenities," The Warwick Economics Research Paper Series (TWERPS) 992, University of Warwick, Department of Economics.
    7. repec:uwp:landec:v:94:y:2018:i:2:p:259-283 is not listed on IDEAS
    8. Yerushalmi, Erez, 2012. "Measuring the administrative water allocation mechanism and agricultural amenities," Economic Research Papers 270633, University of Warwick - Department of Economics.
    9. Rita Martins & Carlota Quintal & Eduardo Barata & Luís Cruz, 2010. "Water Pricing and Social Equity in Portuguese Municipalities," GEMF Working Papers 2010-17, GEMF, Faculty of Economics, University of Coimbra.
    10. Pinto, Francisco Silva & Marques, Rui Cuhna, 2015. "Tariff recommendations: A Panacea for the Portuguese water sector?," Utilities Policy, Elsevier, vol. 34(C), pages 36-44.
    11. Tomas Havranek & Zuzana Irsova & Tomas Vlach, 2018. "Measuring the Income Elasticity of Water Demand: The Importance of Publication and Endogeneity Biases," Land Economics, University of Wisconsin Press, vol. 94(2), pages 259-283.
    12. Fullerton, Thomas M., Jr. & White, Katherine & Smith, Wm. Doyle & Walke, Adam G., 2012. "An Empirical Analysis of Halifax Municipal Water Consumption," MPRA Paper 54113, University Library of Munich, Germany, revised 14 Mar 2013.
    13. repec:spr:envpol:v:20:y:2018:i:3:d:10.1007_s10018-017-0205-6 is not listed on IDEAS
    14. Rita Martins & Luis Cruz & Eduardo Barata, 2013. "Water Price Regulation: A Review of Portuguese Tariff Recommendations," Public Organization Review, Springer, vol. 13(2), pages 197-205, June.
    15. Francisco Silva Pinto & Rui Cunha Marques, 2016. "Tariff Suitability Framework for Water Supply Services," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 30(6), pages 2037-2053, April.
    16. Nuno Teles, 2015. "Financialisation and neoliberalism; The case of water provision in Portugal," Working papers wpaper102, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
    17. Rita Martins & Carlota Quintal & Ana Pimentel, 2009. "Equidade: a chave para explicar os tarifários de água em Portugal?," Notas Económicas, Faculty of Economics, University of Coimbra, issue 29, pages 41-53, June.
    18. Griffin, Ronald C. & Mjelde, James W., 2011. "Distributing water's bounty," Ecological Economics, Elsevier, vol. 72(C), pages 116-128.

    More about this item

    Keywords

    water pricing; nonlinear pricing; increasing block tariffs; water scarcity;

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water

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