Water Pricing Models: a survey
This paper surveys water pricing models, highlighting some important results. Efficiency rquires marginal cost pricing. Intra-annual price changes or customer differentiation to reflect differences in marginal costs can enhance efficiency. A marginal cost pricing mechanism may signal the value that consumers attribute to further capacity expansions as the water supply system approaches its capacity limit and marginal cost rises. However, pure marginal cost pricing may not be feasible while respecting a revenue requirement because marginal costs may be higher or lower than average costs. The most common ways of combining efficiency and revenue requirements are through the use of two-part tariffs, adjusting the fixed charge to meet the revenue requirement, or through second-best pricing like Ramsey pricing. It is not evident whether the best scheme is a two-part tariff or some other pricing mechanism. The role of block rate pricing, increasingly more frequent in actual pricing practices, is yet to be fully investigated.
|Date of creation:||13 Oct 2005|
|Date of revision:|
|Note:||Type of Document - pdf; pages: 16. DINÂMIA - Research Centre for Socioeconomic Change Working Paper n. 45|
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- Barrett, R. & Sinclair, P., 1999. "Water Charges and the Cost of Metering," Discussion Papers 99-05, Department of Economics, University of Birmingham.
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- Andrés Chambouleyron, 2003. "Optimal Water Metering and Pricing," Industrial Organization 0301013, EconWPA.
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