Water Pricing Models: a survey

Abstract

This paper surveys water pricing models, highlighting some important results. Efficiency requires 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.Keywords: water pricing models; capacity constraints; scarcity; revenue requirements; secondbest pricing; block rate pricing JEL Classification: L95, Q25.

Pricing for scarcity? An efficiency analysis of increasing block tariffs

“…Only part of the abundant literature on water pricing provides efficiency results since most studies either compare the properties of different possible price schemes or estimate water demand, and many also point out the difficulties in moving toward more efficient pricing rules. Many important issues, as summarized in the extensive literature review done by Monteiro [2005], are not specific to the water sector: marginal cost pricing, capacity constraints, resource scarcity, revenue requirements, and nonlinear pricing are significant in the more general framework of regulated public utilities, as is clear from studies by Brown and Sibley [1986] and Wilson [1993]. However, such issues appear in this sector combined with some of its peculiarities, such as the prevalence of local natural monopolies, the seasonal and stochastic variability of the resource it aims to supply, and the essential value of the good for its consumers.…”

“…However, such issues appear in this sector combined with some of its peculiarities, such as the prevalence of local natural monopolies, the seasonal and stochastic variability of the resource it aims to supply, and the essential value of the good for its consumers. Nonetheless, Monteiro [2005] notes that whenever justifications for increasing block rates appear, they are not directly related to scarcity concerns. Although in the presence of water scarcity the true cost of water increases because of the emergence of a scarcity cost, it is unclear whether increasing block tariffs are the best way to make consumers understand and respond to water scarcity situations, especially when the resulting tariffs are very complex.…”

Influences of Public Ecological Awareness and Price on Potable Water Consumption in the Geneva Area

“…In the past two decades, many studies have been conducted in order to define the household water demand at different years in several worldwide locations. From Americas to Europe and the emerging Eastern countries, this topic has been analyzed in depth with the purpose to find the best policies for an optimal consumption of this resource (see for example Cavanagh MS et al 2002, Corral-Verdugo V et al 2003, Kerhavarzi AR et al 2006, Kolokytha EG et al 2002, Monteiro H 2005, Nauges C et al 2001, Pashardes P et al 2001, Wong LT et al 2006, Zhang HH et al 2005.…”

“…Actually, several authors have employed econometric methods (Cavanagh MS et al 2002, Monteiro H 2005, Pashardes P et al 2001 to find the best water pricing methods to ensure optimal water price policies. More precisely context analysis, social aspects and other social variables have been taken into account to study household water consumption (see for example Corral-Verdugo V et al 2003, Keshavarzi AR et al 2006, Kolokytha et al 2002, Nauges C et al 2001, Wong LT et al 2006, Zhang HH et al 2005.…”

Préservation des étiages par des méthodes originales de tarification de l’eau d’irrigation

“…La complexité de ces problèmes est parfaitement décrite dans de nombreux ouvrages, et des outils réglementaires se mettent en place, principalement au niveau européen dans le cadre de la DCE (Directive Cadre sur l'Eau), pour les résoudre non pas par une solution unique et universelle, mais, comme pour tout ensemble de problèmes importants et enchevêtrés, par l'orchestration de solutions multiples [Molle, Berkoff, 2007]. Parmi elles, la tarification non linéaire peut contribuer efficacement à l'atteinte des objectifs [Wilson, 1999 ;Ward Pulido-Velazquez, 2009 ;Monteiro, 2005]. La mise en place d'un organisme unique de gestion de l'eau d'irrigation pour chaque périmètre irrigué facilite la mise en oeuvre de ce mode de gestion collective.…”