Increasing Block Tariffs in the Water Sector: An Interpretation in Terms of Social Preferences

Georg Meran and Christian von Hirschhausen

No 1434, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: Many developing countries around the world apply progressive water tariffs, often structured in the form of discretely increasing block tariffs (IBTs). These tariffs have been criticized in the welfare economic literature due to their perceived inefficiency: many of the prices charged under IBTs do not correspond to marginal costs and thus violate the principle of allocative efficiency. In this paper we explore an alternative interpretation of the widespread use of IBTs, in terms of social preferences and fairness considerations. For this, we rely on an extension of the Fehr and Schmidt (1999) utility function, including inequality aversion, to which we add another parameter representing a preference for redistribution, which reflects a societal preference to correct for income difference perceived as unfair. In addition, the paper also includes household size in the analysis, finding that as poor households are on average larger (in per capita terms), a simple IBT tariff disregarding household size may not be "fair" at all. We conclude on a methodological note on the importance of addressing allocative and distributional issues simultaneously.

Keywords: water; tariffication; prices; fairness; distribution; institutions (search for similar items in EconPapers)
JEL-codes: D40 H21 L51 L95 (search for similar items in EconPapers)
Pages: 39 p.
Date: 2014
New Economics Papers: this item is included in nep-agr and nep-upt
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Citations: View citations in EconPapers (3)

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Journal Article: Increasing Block Tariffs in the Water Sector – An Interpretation in Terms of Social Preferences (2017)
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