The Distributional Incidence of Residential Water and Electricity Subsidies

26 Pages Posted: 9 Oct 2006

Date Written: April 5, 2006

Abstract

Subsidies to residential utility customers are popular among policymakers, utility managers, and utility customers alike, but they are nonetheless the subject of much controversy. Utility subsidies are seen as a way to help make utility service affordable for poor households and as an alternative mechanism for income redistribution. These arguments in favor of subsidies are countered by serious concerns about their adverse effects on consumer behavior, utility operations, and the financial health of utilities. Both the affordability and redistributive arguments for subsidies are based on the presumption that poor households benefit disproportionately from water and electricity subsidies, that they are well-targeted to the poor. The authors test this assumption by examining the extent to which the poor benefit from consumption and connection subsidies for water and electricity services. Their analysis of a wide range of subsidy models from around the developing world shows that the most common form of utility subsidy - quantity-based subsidies delivered through the tariff structure - are highly regressive. Geographically targeted or means-tested subsidies do better, and in many cases have a progressive incidence, but large numbers of poor households remain excluded. Low levels of coverage and metering severely limit the effectiveness of consumption subsidy schemes to reach the poor. Simulations suggest that connection subsidies are an attractive alternative for low coverage areas, but only if utilities have the means and motivation to extend network access to poor households and only if those households choose to connect.

Keywords: Economic Theory & Research, Tax Law, Energy Production and Transportation; Urban Water Supply and Sanitation, Town Water Supply and Sanitation

Suggested Citation

Komives, Kristin and Halpern, Jonathan and Foster, Vivien and Wodon, Quentin T. and Abdullah, Roohi, The Distributional Incidence of Residential Water and Electricity Subsidies (April 5, 2006). World Bank Policy Research Working Paper No. 3878. Available at SSRN: https://ssrn.com/abstract=936032

Kristin Komives (Contact Author)

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Jonathan Halpern

Georgetown University ( email )

Washington, DC 20057
United States

Vivien Foster

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Quentin T. Wodon

World Bank ( email )

1818 H Street NW
Washington, DC 20433
United States
202-473-1446 (Phone)
202-522-0054 (Fax)

Roohi Abdullah

World Bank ( email )

Washington, DC 20433
United States

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