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Politically Feasible, Revenue Sufficient, And Economically Efficient Municipal Water Rates

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  • DARWIN C. HALL

Abstract

Water rates are designed to meet multiple objectives, typically resulting in trade‐offs among the objectives of economic efficiency, revenue sufficiency, and related revenue stability. Standard theory of natural monopoly is extended here to explain why long‐run marginal cost (LMC) can be greater than both average cost and short‐run marginal cost (SMC) for municipal water utilities. The distinctions between “benign monopoly rates” and “marginal cost rate design” favor LMC over SMC as the basis for economically efficient rate design. Taking into account conservation investments by consumers, SMC rates are economically inefficient, except during temporary shortages. The City of Los Angeles adopted economically efficient, revenue sufficient, and revenue‐stable water rates at the end of a prolonged drought. After the drought ended, Los Angeles (LA) modified the rate design, making the design politically feasible during normal rainfall years. Unique features in the LA rate design determine the allocation of consumer surplus among ratepayers, making the rate design politically feasible by sharing efficiency gains among customer classes. Revenue sufficiency and stability features in the rate design minimize adverse job effects on water utility management, reducing the frequency of rate hearings with an increasing block design. (JEL L51, L95, Q25, Q51)

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  • Darwin C. Hall, 2009. "Politically Feasible, Revenue Sufficient, And Economically Efficient Municipal Water Rates," Contemporary Economic Policy, Western Economic Association International, vol. 27(4), pages 539-554, October.
    • Handle: RePEc:bla:coecpo:v:27:y:2009:i:4:p:539-554
    DOI: 10.1111/j.1465-7287.2009.00164.x
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    References listed on IDEAS

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    1. Garcia, Serge & Reynaud, Arnaud, 2004. "Estimating the benefits of efficient water pricing in France," Resource and Energy Economics, Elsevier, vol. 26(1), pages 1-25, March.
    2. Hall, Darwin C. & Behl, Richard J., 2006. "Integrating economic analysis and the science of climate instability," Ecological Economics, Elsevier, vol. 57(3), pages 442-465, May.
    3. Darwin C. Hall, 2009. "Prescriptive Public Choice: Application To Residential Water Rate Reform," Contemporary Economic Policy, Western Economic Association International, vol. 27(4), pages 555-565, October.
    4. Paul L. Joskow, 1976. "Contributions to the Theory of Marginal Cost Pricing," Bell Journal of Economics, The RAND Corporation, vol. 7(1), pages 197-206, Spring.
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    Citations

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    Cited by:

    1. Liang Lu & David Deller & Morten Hviid, 2019. "Price and Behavioural Signals to Encourage Household Water Conservation: Implications for the UK," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 33(2), pages 475-491, January.
    2. Kenneth A. Baerenklau & Kurt A. Schwabe & Ariel Dinar, 2014. "The Residential Water Demand Effect of Increasing Block Rate Water Budgets," Land Economics, University of Wisconsin Press, vol. 90(4), pages 683-699.
    3. Fuente, David, 2019. "The design and evaluation of water tariffs: A systematic review," Utilities Policy, Elsevier, vol. 61(C).
    4. Pinto, Francisco Silva & Marques, Rui Cuhna, 2015. "Tariff recommendations: A Panacea for the Portuguese water sector?," Utilities Policy, Elsevier, vol. 34(C), pages 36-44.
    5. Liang Lu & David Deller & Morten Hviid, 2018. "Price and Behavioural Signals to Encourage Household Water Conservation in Temperate Climates," Working Paper series, University of East Anglia, Centre for Competition Policy (CCP) 2018-01, Centre for Competition Policy, University of East Anglia, Norwich, UK..
    6. Yiğit Sağlam, 2019. "Welfare Implications of Water Scarcity: Higher Prices of Desalination," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 73(4), pages 995-1022, August.
    7. Darwin C. Hall, 2009. "Prescriptive Public Choice: Application To Residential Water Rate Reform," Contemporary Economic Policy, Western Economic Association International, vol. 27(4), pages 555-565, October.
    8. Heather Hodges & Colin Kuehl & Sarah E. Anderson & Phillip J. Ehret & Cameron Brick, 2020. "How Managers Can Reduce Household Water Use Through Communication: A Field Experiment," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 39(4), pages 1076-1099, September.
    9. Francisco Silva Pinto & Rui Cunha Marques, 2016. "Tariff Suitability Framework for Water Supply Services," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 30(6), pages 2037-2053, April.

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    More about this item

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects

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