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Water Tariff Setting and Its Welfare Implications: Evidence from Cities in the People’s Republic of China

Author

Listed:
  • Jiang, Yi

    (Asian Development Bank)

  • Calub, Renz Adrian

    (Asian Development Bank)

  • Zheng, Xiaoting

    (Jinan University)

Abstract

We develop a framework to analyze urban water tariff setting and its welfare implications and apply it to a panel of cities in the People’s Republic of China in the 2000s. First, we find that peer cities’ water tariff levels have a significant influence on a city’s choice of tariffs. We use the peer cities’ average tariff as an instrumental variable to estimate water demand functions, which yields elasticity estimates of around –0.41 for both residential and industrial sectors. Second, estimation of cost functions reveals the supply of urban water services to be characterized by strong economies of scale with the majority of sample city–years on the downward sloping segment of marginal cost curves. More than half of the sample have residential water tariffs higher than the corresponding marginal costs while the share increases to 71% for the industrial sector. The deadweight loss calculated under first-best pricing suggests moderate welfare loss due to prices deviating from the equilibrium. Finally, we show that taking into account nonrevenue water losses justifies an efficient price higher than the equilibrium price.

Suggested Citation

  • Jiang, Yi & Calub, Renz Adrian & Zheng, Xiaoting, 2019. "Water Tariff Setting and Its Welfare Implications: Evidence from Cities in the People’s Republic of China," ADB Economics Working Paper Series 580, Asian Development Bank.
    • Handle: RePEc:ris:adbewp:0580
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    deadweight loss; multiproduct cost function; nonrevenue water; water demand; water tariff;
    All these keywords.

    JEL classification:

    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities
    • 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
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

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