Water Tariff Setting and Its Welfare Implications: Evidence from Cities in the People’s Republic of China

Yi Jiang (), Renz Adrian Calub () and Xiaoting Zheng ()
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Yi Jiang: Asian Development Bank
Renz Adrian Calub: Asian Development Bank
Xiaoting Zheng: Jinan University

No 580, ADB Economics Working Paper Series from Asian Development Bank

Abstract: We develop a framework to analyze urban water tariff setting and its welfare implications and apply it to a panel of cities in the People’s Republic of China in the 2000s. First, we find that peer cities’ water tariff levels have a significant influence on a city’s choice of tariffs. We use the peer cities’ average tariff as an instrumental variable to estimate water demand functions, which yields elasticity estimates of around –0.41 for both residential and industrial sectors. Second, estimation of cost functions reveals the supply of urban water services to be characterized by strong economies of scale with the majority of sample city–years on the downward sloping segment of marginal cost curves. More than half of the sample have residential water tariffs higher than the corresponding marginal costs while the share increases to 71% for the industrial sector. The deadweight loss calculated under first-best pricing suggests moderate welfare loss due to prices deviating from the equilibrium. Finally, we show that taking into account nonrevenue water losses justifies an efficient price higher than the equilibrium price.

Keywords: deadweight loss; multiproduct cost function; nonrevenue water; water demand; water tariff (search for similar items in EconPapers)
JEL-codes: L95 Q21 Q25 Q28 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2019-05-14
New Economics Papers: this item is included in nep-tra and nep-ure
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