Socio-economic determinants of pricing water for domestic use: A comparison of blocks and linear tariffs

This article explores a model in which an agency can adopt different tariff schemes (block tariff or linear tariff) for selling water to a domestic buyer (a household), considering socio-economic factors like household size and income level. Through the formulation and examination of a static game involving a buyer and an agency, where the latter considers also the buyer’s welfare in its decisions, the socio-economic determinants significantly affect the optimal pricing within each of the two suggested tariff schemes. This analysis leads to the identification of conditions under which the agency deems a block tariff more advantageous compared to a linear tariff, as well as circumstances where adopting a linear pricing strategy emerges as the optimal approach. By introducing a (discrete-time) dynamic extension of the model, in which the agency is assumed to operate as a boundedly rational agent, we investigate the role of the altruism that the agency decides to adopt toward the buyer, observing that it ends up affecting the price dynamics (defined by a gradient-like mechanism). In addition, we apply the model to the real case of the Apulia region in Italy, comparing the unit price currently applied in the region with the results of applying the model in the Apulian territory.