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Water Pricing Models: a survey

Henrique Monteiro ()

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Abstract: 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.

Keywords: water pricing models; capacity constraints; scarcity; revenue requirements; second-best pricing; block rate pricing (search for similar items in EconPapers)
JEL-codes: L95 Q25 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-agr and nep-mic
Date: 2005-10-13
Note: Type of Document - pdf; pages: 16. DINÂMIA - Research Centre for Socioeconomic Change Working Paper n. 45
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