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The welfare economics of optional water metering with asymmetric information

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  • Simon Cowan

Abstract

The paper develops a model of decentralized metering decisions when selective metering is socially optimal. Households choose between two-part tariffs. Decentralization achieves social efficiency when the regulator, who knows household characteristics, gives household-specific compensation (via a reduction in the lump-sum charge on choosing to have a meter), while allowing for the cost of metering. Relative to the status quo of no metering the full-information scheme provides a Pareto improvement. With asymmetric information the first-best allocation of meters can be achieved when only small consumers should have meters. When large consumers alone should be metered it is not possible to separate customers. An exogenous signal that is highly correlated with the unknown type can, however, help to alleviate this problem. The policy of requiring meters to be provided free is problematic because the first-best allocation does not enable all the water supplier`s costs to be recovered.

Suggested Citation

  • Simon Cowan, 2006. "The welfare economics of optional water metering with asymmetric information," Economics Series Working Papers 273, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:273
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    References listed on IDEAS

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    More about this item

    Keywords

    Water Metering; Optional; Two-part Tariffs; Asymmetric Information;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water

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