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Pricing for Scarcity

  • Roseta-Palma, Catarina
  • Monteiro, Henrique

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.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 10384.

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Date of creation: Jun 2008
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Handle: RePEc:pra:mprapa:10384
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  1. repec:cup:cbooks:9780521314008 is not listed on IDEAS
  2. 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.
  3. 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.
  4. Wilson, Robert, 1997. "Nonlinear Pricing," OUP Catalogue, Oxford University Press, number 9780195115826.
  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. 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.
  7. 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.
  8. Henrique Monteiro, 2005. "Water Pricing Models: a survey," Others 0510002, EconWPA.
  9. J. Elnaboulsi, 2001. "Nonlinear Pricing and Capacity Planning for Water and Wastewater Services," Water Resources Management, Springer, vol. 15(1), pages 55-69, February.
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