Efficiency and Equity in Two-Part Tariffs: The Case of Residential Water Rates

28 Pages Posted: 30 Sep 2014

See all articles by Simon Porcher

Simon Porcher

IAE Paris - Sorbonne Business School

Date Written: April 16, 2013

Abstract

As first noticed by Coase (1946), a standard result in utility regulation is that efficiency requires two-part tariffs with marginal prices set to marginal costs and fixed fees equal to each customer’s share of fixed costs. Residential water customers in France face marginal prices for water that average about 8% more than marginal costs. Under price elasticity estimates that are consistent with previous results in the literature, efficiency costs represent around 8 million euros of welfare losses for 2008. Even though the impact is fairly small, current price schedules are an important pre-existing distortion which should be considered when evaluating current taxes aimed at addressing external costs. Moreover, efficiency gains from reformed tariffs could be used to fund water assistance programs focused on financially stressed households.

Keywords: public-private partnerships, water industry, Two-Part Tariffs, Efficient Pricing

JEL Classification: D21, D82, L33, L95

Suggested Citation

Porcher, Simon, Efficiency and Equity in Two-Part Tariffs: The Case of Residential Water Rates (April 16, 2013). Applied Economics, Vol. 46, No. 5, 2014. Available at SSRN: https://ssrn.com/abstract=2496964

Simon Porcher (Contact Author)

IAE Paris - Sorbonne Business School ( email )

IAE - Université Paris I Panthéon-Sorbonne
8 bis rue croix de Jarry
Paris, 75013
France

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