Pricing for scarcity? An efficiency analysis of increasing block tariffs

Journal of Environmental Economics and Management, 2007

We estimate the price elasticity of water demand with household-level data, structurally modeling the piecewise-linear budget constraints imposed by increasing block pricing. We develop a mathematical expression for the unconditional price elasticity of demand under increasing block prices and compare conditional and unconditional elasticities analytically and empirically. We test the hypothesis that price elasticity may depend on price structure, beyond technical differences in elasticity concepts. Due to the possibility of endogenous utility price structure choice, observed differences in elasticity across price structures may be due either to a behavioral response to price structure, or to underlying heterogeneity among water utility service areas.

Water Policy, 2008

A key policy question in designing urban water policy and institutional reforms is: what should be the appropriate structure of water charges to ensure long-term sustainability of water service? This is because water pricing touches on equity and on the willingness of the consumer to pay, but more on its affordability. This study focuses on understanding the nature of household demand for water, and attempts to express the household demand functions. A panel of data of 10,564 complete observations on water bills, drawn from a household expenditure survey conducted in 2003, is used to estimate domestic water demand function. Price and other dummy variables were used in the analysis and the results discussed. Specifically, the household water demand and the per capita demand are analysed, taking into consideration such variables as marginal price, rate structure premium and level of household income. The results show that the estimated water demand is inelastic and so is the income elasticity. The effect of the findings on water policy making in regard to pricing is cited. Limitations of price effectiveness as a tool to curtail water consumption are highlighted.

Water Policy, 2007

A residential water demand equation is estimated using a panel data sample of five Portuguese local communities and 72 months, corresponding to a total number of 360 observations. Because of the presence of multi-part tariffs, we use the two common price-related variables: marginal price and difference as explanatory variables. To prevent the simultaneity bias from using observed quantities to determine the values of marginal price and difference directly from the rate schedule, we use an instrumental variable approach to create a constant marginal price and difference parameters for each rate structure. The price elasticity values obtained fall within the range of those found in other case studies. Thus, although presenting weak elasticity, price seems to play a role in water demand management. However, we do not confirm the expected influence of difference on residential water demand. This can be a consequence of the complexity of the Portuguese water tariffs and the confusing sig...

Water Resources Research, 2007

1] We exploit a unique data set to estimate the degree of economies of scale in water consumption, controlling for the standard demand factors. We found a linear Engel curve in water consumption: each additional household member consumes the same water quantity regardless of household size, except for a single-person household. Our evidence suggests that the increasing block tariffs (IBT) structure, which is indifferent to household size, has unintended consequences. Large households, which are also likely to be poor given the negative correlation between income and household size, are charged a higher price for water. The degree of economies of scale found here erodes the effectiveness of IBT price structure as a way to introduce an equity consideration. This implication is important in view of the global trend toward the use of IBT.

2000

We exploit a unique data set to estimate the degree of economies of scale in water consumption, controlling for the standard demand factors. We found a linear Engel curve in water consumption: each additional household member consumes the same amount regardless of household size, except for a single person household. Our evidence suggests that the IBT (increasing block tariffs) structure,

Water Resources Research, 2004

1] The existing literature on nonresidential water demand has primarily employed crosssectional models based on time-aggregated data. In this study, we analyze panel data models of commercial water demand that build on monthly observations of water use and marginal prices for individual customers. This allows for a closer investigation of the temporal aspects of commercial water demand. We show that commercial water demand can exhibit strong seasonal patterns. These temporal consumption patterns aggravate simultaneity problems associated with block pricing if they are not explicitly accounted for in demand specifications.

SSRN Electronic Journal, 2000

We exploit a unique data set to estimate the degree of economies of scale in water consumption, controlling for the standard demand factors. We found a linear Engel curve in water consumption: each additional household member consumes the same amount regardless of household size, except for a single person household. Our evidence suggests that the IBT (increasing block tariffs) structure, which is indifferent to household size, has unintended consequences. Large households, which are also likely to be poor given the negative correlation between income and household size, are forced to pay higher price for water. The degree of economies of scale found here erodes the logic of using an IBT price structure as a way to introduce an equity consideration. This implication is important in view of the global trend toward the use of IBT.

Resource and energy economics, 2004

The purpose of this paper is to evaluate the pricing of French water utilities. An econometric model describing both water supply and demand is specified and estimated on utilities located in the Bordeaux area. Based on the estimated technology and demand parameters, we simulate marginal-cost pricing (first-best pricing) and social surplus variations. We find a significant difference between observed marginal prices and marginal costs. We show that the optimal pricing scheme is characterized, first by higher marginal prices and second by a lower fixed charge. However, moving towards efficient prices does not result in important direct welfare effects.

2000

Journal of the American Water Resources Association, 1992

ABSTRACT: Little is known about how different types of municipal water rate structures influence residential water use. Conventional wisdom suggests that increasing block rate structures promote con-servation, but analysis of data from 85 Massachusetts communities does not support ...