Optimal Pricing of Water: Optimal Departures from the Inverse Elasticity Rule
I consider the problem of water usage, developing a model to analyze the optimal pricing of water within a second-best economy. Consumers are assumed to have two main needs for water|drinking and non-drinking. Water is also used to produce food: The agricultural sector has a derived demand for water. As a water supplier, the local government may price discriminate across consumers and farmers. I introduce the second-best pricing scheme, derive conditions for the marginal-cost pricing and inverse-elasticity rules to apply, and analyze when it is optimal for the government to optimally deviate from these two pricing schemes.
|Date of creation:||2011|
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- D. Appels & R. Douglas & G. Dwyer, 2005.
"Responsiveness of Demand for Irrigation Water: A Focus on the Southern Murray-Darling Basin,"
- Appels, David & Douglas, Robert A. & Dwyer, Gavan, 2004. "Responsiveness of Demand for Irrigation Water: A Focus on the Southern Murray-Darling Basin," Staff Working Papers 31924, Productivity Commission.
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- Baumol, William J & Bradford, David F, 1970. "Optimal Departures from Marginal Cost Pricing," American Economic Review, American Economic Association, vol. 60(3), pages 265-83, June.
- Diakité, Daouda & Semenov, Aggey & Thomas, Alban, 2009. "A proposal for social pricing of water supply in Côte d'Ivoire," Journal of Development Economics, Elsevier, vol. 88(2), pages 258-268, March.
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