Optimal Pricing of Water: Optimal Departures from the Inverse Elasticity Rule

Yiğit Sağlam

No 18553, Working Paper Series from Victoria University of Wellington, School of Economics and Finance

Abstract: I consider the problem of water usage, developing a model to analyze the optimal pricing of water within a second-best economy. Consumers are assumed to have two main needs for water|drinking and non-drinking. Water is also used to produce food: The agricultural sector has a derived demand for water. As a water supplier, the local government may price discriminate across consumers and farmers. I introduce the second-best pricing scheme, derive conditions for the marginal-cost pricing and inverse-elasticity rules to apply, and analyze when it is optimal for the government to optimally deviate from these two pricing schemes.

Keywords: water; model; optimal; pricing (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:vuw:vuwecf:18553

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