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Unformatted text preview: Handout-Price and Rate Structure EEP 162: Water Resource Economics We do not have time in section to go over all of the issues involved in price and rate structures. This handout provides a brief overview of issues involved in pricing water delivered to municipal water users by public water supply systems. Refer either to Hanemanns article in the reader (p182) or the lecture notes associated with the topic for more detailed information. If you find any of these issues particularly confusing, please send me an email and depending on the number of responses I get I will either revisit some of these ideas in section or set up a time to go over them during office hours. 1. Components of a Water Rate Structure Flat charges vs. charges that vary with quantity Uniform vs. Block rate variable charges: Uniform-amount paid per unit of consumption is the same over all units consumed. Block rateunit charge varies, either decreasing with the amount consumed (decreasing-block rate) or increasing with the amount consumed (increasing-block rate). Rates that charge different prices in different time periods versus those that change the same price in all time periods Additional charges (e.g. connection charge), special rates for par- ticular classes of users (e.g. low income). 2. Criteria for designing water rates Generate revenuerates generate revenue that permits a utility to cover its costs. 1 Allocate costsrates serve to allocate costs among different types of users. Provide incentivesrates provide price signals to customers which may serve as incentives for them to use water efficiently, encour- aging them to modify their behavior in particular directions. 3. Difficult to apply these criteria in practice : Some of the criteria may conflict (e.g. revenue stability and eco- nomic efficiency). More than one party involved in determining rate-setting process (utility, customer, society), thus inherently a political process. Complicated nature of water utility costs. The very nature of wa- ter utility costs tends to create conflicts between the criteria of raising adequate revenues, allocating costs fairly, and providing incentives for efficiency and conservation. Embedded costs (his- torical average cost) vs. marginal cost (replacement cost). 4. Goals in price setting: Raise revenue Redistribution of cost burden among users Promote efficiency in water use and water supply (marginal cost pricing) Change consumer behavior 5. Marginal Cost Pricing Focus on economic efficiency. The criterion for economic efficiency is to maximize the sum of Consumer Surplus and Producer Sur-...
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- Spring '07