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Pricing for Scarcity

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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
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    References listed on IDEAS

    as
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    Cited by:

    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. 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, vol. 2(7), pages 1-21, July.
    4. 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.
    5. Yerushalmi, Erez, 2012. "Measuring the administrative water allocation mechanism and agricultural amenities," Economic Research Papers 270633, University of Warwick - Department of Economics.
    6. 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.
    7. Kenneth A. Baerenklau & María Pérez-Urdiales, 2019. "Can Allocation-Based Water Rates Promote Conservation and Increase Welfare? A California Case Study," Water Economics and Policy (WEP), World Scientific Publishing Co. Pte. Ltd., vol. 5(02), pages 1-26, April.
    8. Chang Liu & Boqiang Lin, 2018. "Evaluating Design of Increasing Block Tariffs for Residential Natural Gas in China: A Case Study of Henan Province," Computational Economics, Springer;Society for Computational Economics, vol. 52(4), pages 1335-1351, December.
    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. Garcia-Valiñas, Maria A. & Athukorala, Wasantha & Wilson, Clevo & Torgler, Benno & Gifford, Robert, 2014. "Nondiscretionary residential water use: the impact of habits and water-efficient technologies," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 58(2), April.
    11. Shyama Ratnasiri & Clevo Wilson & Wasantha Athukorala & Maria A. Garcia-Valiñas & Benno Torgler & Robert Gifford, 2018. "Effectiveness of two pricing structures on urban water use and conservation: a quasi-experimental investigation," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 20(3), pages 547-560, July.
    12. 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.
    13. Nuno Teles, 2015. "Financialisation and neoliberalism; The case of water provision in Portugal," Working papers wpaper102, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
    14. Griffin, Ronald C. & Mjelde, James W., 2011. "Distributing water's bounty," Ecological Economics, Elsevier, vol. 72(C), pages 116-128.
    15. 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.
    16. 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.
    17. 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.
    18. Yiğit Sağlam, 2019. "Welfare Implications of Water Scarcity: Higher Prices of Desalination," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 73(4), pages 995-1022, August.
    19. 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.
    20. Hejazi, Mohamad & Edmonds, James & Clarke, Leon & Kyle, Page & Davies, Evan & Chaturvedi, Vaibhav & Wise, Marshall & Patel, Pralit & Eom, Jiyong & Calvin, Katherine & Moss, Richard & Kim, Son, 2014. "Long-term global water projections using six socioeconomic scenarios in an integrated assessment modeling framework," Technological Forecasting and Social Change, Elsevier, vol. 81(C), pages 205-226.
    21. 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.
    22. 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.

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    More about this item

    Keywords

    water pricing; nonlinear pricing; increasing block tariffs; water scarcity;
    All these keywords.

    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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