Welfare and Distribution Effects of Water Pricing Policies

28 Pages Posted: 27 Sep 2007  

Arjan Ruijs

Wageningen UR - Environmental Economics and Natural Resources Group

Date Written: September 2007

Abstract

In this paper, distribution and welfare effects of changes in block price systems are evaluated. A method is discussed to determine, for a Marshallian demand function, equivalent variation in case of a block price system. The method is applied to analyze welfare and distribution effects of changing water prices in the Metropolitan Region of Sao Paulo. Results show that there is a trade off between average welfare and income distribution. A pro-poor price system may result in lower average welfare than a flat price system, but in higher individual welfare for the poor. Moreover, there is a trade off between revenues for the water company and income distribution. Even though pro-poor price systems may not be as good for average welfare as flat price systems, their direct effects on poverty are important. Introducing pro-poor price systems, however, may have financial consequences for the water companies.

Keywords: Water Demand, Welfare Economics, Equivalent Variation

JEL Classification: D63, Q25, Q56

Suggested Citation

Ruijs, Arjan, Welfare and Distribution Effects of Water Pricing Policies (September 2007). FEEM Working Paper No. 92.2007. Available at SSRN: https://ssrn.com/abstract=1017476 or http://dx.doi.org/10.2139/ssrn.1017476

Arjan Ruijs (Contact Author)

Wageningen UR - Environmental Economics and Natural Resources Group ( email )

P.O. Box 8130
Wageningen, 6700 EW
Netherlands

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