Quality-Discriminant Water Pricing

Abstract

Decisions on the pricing of water services, as noted before, have traditionally been made according to legal, administrative, and financial criteria rather than economic considerations. There has been much focus on supply-side price strategies to alleviate or to anticipate conflicts between various users when supply is limited. Various pricing policies have been designed in various countries, the simplest being flat-rate tariffs, where water fees are not directly related to quantities of water used, and average-cost pricing. Other pricing policies include declining-block progressive-block tariffs, where succeeding blocks of units of water are sold at lower and higher prices, respectively, as well as two-part tariffs, which include a fixed component, often varying according to some characteristics of the user, and a variable component based on average-cost pricing in the form of a single volumetric charge (OECD 1987). It is argued that water systems experience decreasing unit costs with increasing usage, and thus that the declining-block tariff structure passes these cost savings on to consumers. However, the structure has no direct relation to the value of water and its opportunity costs. It also does not track direct cost, with the result that small users subsidize large users. Furthermore, given the growing scarcity of water due to competition between environmental quality requirements and economic activities requiring water, and the gradual elimination of more accessible sources of water supply, expansion costs are increasing and thus the assumption of economies of scale may not hold true.