Increasing Block Tariffs in the Water Sector: A Semi-Welfarist Approach

27 Pages Posted: 3 Sep 2009

See all articles by Georg Meran

Georg Meran

German Institute for Economic Research (DIW Berlin)

Christian von Hirschhausen

German Institute for Economic Research (DIW Berlin) - Department of International Economics

Date Written: June 1, 2009

Abstract

We analyze the properties of progressive water tariffs that are often applied in the sector in the form of discretely increasing block tariffs (IBT). We are particularly interested in water tarification in a poverty context where a subsistence level of water has to be allocated to each household. Our approach is "semi-welfarist" to the extent that we analyze second-best pricing schemes that may be applied in practice due to "fairness" or other, non-welfarist considerations. In our theoretical model we compare a modified Coase-tariff and a progressively increasing block tariff with respect to water consumption, water expenses and utility levels. When we impose cost coverage on the water utility, there are clearly adverse effects on the "almost poor" by introducing a progressive tariff. This result is supported with a numerical application using real data from Bangladesh: progressive tariffs may fail to achieve "fair" cross-subsidization of low-income groups.

Keywords: water, tarification, prices, fairness, distribution, institutions

JEL Classification: L51, L95, H21, D4

Suggested Citation

Meran, Georg and von Hirschhausen, Christian, Increasing Block Tariffs in the Water Sector: A Semi-Welfarist Approach (June 1, 2009). DIW Berlin Discussion Paper No. 902, Available at SSRN: https://ssrn.com/abstract=1465562 or http://dx.doi.org/10.2139/ssrn.1465562

Georg Meran (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Christian Von Hirschhausen

German Institute for Economic Research (DIW Berlin) - Department of International Economics ( email )

Mohrenstraße 58
Berlin, 10117
Germany
+49-30-89789-343 (Phone)
+49/30/897 89 -200 (Fax)

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