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|
|Date of revision:|
|Contact details of provider:|| Postal: Alice Fong, Administrator, School of Economics and Finance, Victoria Business School, Victoria University of Wellington, PO Box 600 Wellington, New Zealand|
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Web page: http://www.victoria.ac.nz/sef
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- Diakité, Daouda & Semenov, Aggey & Thomas, Alban, 2009.
"A proposal for social pricing of water supply in Côte d'Ivoire,"
Journal of Development Economics,
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- Garcia, Serge & Reynaud, Arnaud, 2004. "Estimating the benefits of efficient water pricing in France," Resource and Energy Economics, Elsevier, vol. 26(1), pages 1-25, March.
- 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.
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