Optimal water tariffs for domestic, agricultural and industrial use

Andrea Caravaggio (), Luigi De Cesare () and Andrea Di Liddo ()
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Andrea Caravaggio: University of Siena
Luigi De Cesare: University of Foggia
Andrea Di Liddo: University of Foggia

Annals of Operations Research, 2024, vol. 337, issue 3, No 17, 1135-1165

Abstract: Abstract Consider a water supplier who determines sales rates with the goals of maximizing profits, protecting consumer welfare, and ensuring adequate future water supplies. Buyers are differentiated and can use the water for domestic, agricultural, and industrial purposes. We propose a leader-follower finite-horizon differential game. The leader (the water supplier) determines the selling price and the followers (consumers) react by requesting their optimal amount of water. We calculate a feedback Stackelberg equilibrium assuming that all user demand is satisfied (interior equilibrium). We compare two different tariff schemes: linear tariffs (the price paid is a multiple of the volume of water purchased), and increasing block tariffs (the unit price is lower for quantities of water that do not exceed a fixed threshold). We show that block pricing is never optimal and linear pricing is always preferred.

Keywords: Water pricing; Block tariffs; Differential games; Stackelberg equilibrium; Corner solutions; 91A23; 91B76; 91B15 (search for similar items in EconPapers)
JEL-codes: C72 C73 Q25 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10479-024-05822-y

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