Skip to main content
SpringerLink
Log in

The Theory of Water and Utility Pricing

  • Chapter
  • First Online:
Global Drinking Water Management and Conservation

Part of the book series: Springer Water ((SPWA))

  • 1436 Accesses

Abstract

In this chapter, we survey the theory and practice of the pricing of water as a public utility. Section 2 reviews the classic theory of marginal cost pricing developed by Dupuit (1854). and expanded by Hotelling Hotelling (1938). We also review pricing in the context of the development of the new theory of public economics and include Ramsey pricing, and Shadow Ramsey pricing and compute the latter for a group of reverse osmosis treatment plants.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
Chapter
USD 29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD 84.99
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Hardcover Book
USD 109.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

Notes

  1. 1.

    On 28 July 2010, through Resolution 64/292, the United Nations General Assembly explicitly recognized the human right to water and sanitation and acknowledged that clean drinking water and sanitation are essential to the realization of all human rights.

  2. 2.

    This marginal cost is the difference between the cost of providing water service infrastructure to residential users and the total cost of providing water to all users (Forfas 2008).

  3. 3.

    A marginal cost pricing approach would use two-part tariffs with a price set to marginal cost and fixed charges equal to total fixed cost (Coase 1946). In the water industry, the two-part tariffs imply setting the fixed charges equal to each customer’s share of the utilities’ fixed costs and the volumetric charges equal to marginal costs (García-Valiñas et al. 2013).

  4. 4.

    In-house management means that the local government provides the water service itself. The city council is responsible for decision making and management, uses its own employees and covers production costs with funds from the municipal budget (García-Valiñas et al. 2013).

  5. 5.

    Contractual PPPs is a form of privatizing public services in Spain. That is a local government entrusts an individual or corporation to manage the urban water service but retains ownership (García-Valiñas et al. 2013).

  6. 6.

    Institutionalized PPPs refers to the private sector participating in the management of the urban water service, while capital is shared between the private and public sector (García-Valiñas et al. 2013).

References

  • Atkinson A, Stern N (1974) Pigou, taxation and public goods. Rev Econ Stud 41:119–128

    Article  Google Scholar 

  • Atkinson A, Stiglitz J (1976) The design of tax structure: direct versus indirect taxation. J Public Econ 6(1):55–75

    Article  Google Scholar 

  • Australia National Water Commission (2008) Urban water pricing: National Water Commission position. National Water Commission, Canberra

    Google Scholar 

  • Australia National Water Commission (2011) Archive—National Water Commission—Efficient water resource pricing in Australia: an assessment of administered scarcity pricing in urban areas. http://archive.nwc.gov.au/library/waterlines/44. Accessed 21 April 2014.

  • Baumol W, Bradford D (1970) Optimal departures from marginal cost pricing. Am Econ Rev 60:265–283

    Google Scholar 

  • Beecher J (2011) Commission jurisdiction database 2011. Institute of public utilities regulatory research and education. Michigan State University, East Lansing, MI

    Google Scholar 

  • Beecher J, Kalmbach J (2013) Structure, regulation, and pricing of water in the United States: A study of the Great Lakes region. Util Policy 24:32–47

    Article  Google Scholar 

  • Biswas A, Kirchherr J (2012) Water prices in Europe need to rise substantially to encourage more sustainable water consumption. EUROPP – European Politics and Policy. http://blogs.lse.ac.uk/europpblog/2012/10/31/europe-water-prices/. Accessed 15 April 2014.

  • Boadway R (1997) Public economics and the theory of public policy. Canadian J Econ 30(4a):753–772

    Article  Google Scholar 

  • Boardman A, Vining A (1989) Ownership and performance in competitive environments: a comparison of the performance of private, mixed, and state-owned enterprises. J Law Econ 32:1–33

    Article  Google Scholar 

  • Bos D, Peters W (1988) Privatization, internal control, and internal regulation. J Public Econ 36:231–258

    Article  Google Scholar 

  • Bos D, Peters W (1991) Privatization and public enterprises. Empirica 18:5–16

    Article  Google Scholar 

  • Brady J, Gray N (2013) Analysis of water pricing in Ireland and recommendations towards a more efficient water sector. Water Policy 15(3):435–457

    Article  Google Scholar 

  • Brubaker E (2011) The Promise of privatization. http://www.probeinternational.org/envirowaterarticles/thePromiseofPrivitization.pdf. Accessed 21 July 2014

  • Coase R (1946) The marginal cost controversy. Economica 13:169–182

    Article  Google Scholar 

  • Commission on Taxation (2009) Commission on taxation report. Commission on Taxation, Dublin

    Google Scholar 

  • Cour des Comptes (2011) Les services publics d‘eau et d‘assainissement: des evolutions encourageantes. (The public water and sanitation: Encouraging developments). Report, Cour des Comptes, Paris

    Google Scholar 

  • Dasgupta P, Stiglitz J (1972) On optimal taxation and public production. Rev Econ Stud 39:87–103

    Google Scholar 

  • Dexia Crédit Local de France (2006). Les services publics locaux dans les villes moyennes et leurs intercommunalités. (Local public services in smaller towns and intercommunity). Technical report

    Google Scholar 

  • Diamond P, Mirrlees J (1971a) Optimal taxation and public production I: Production efficiency. Am Econ Rev 61:8–27

    Google Scholar 

  • Diamond P, Mirrlees J (1971b) Optimal taxation and public production II: Tax rules. Am Econ Rev 61:261–278

    Google Scholar 

  • Dore M, Kushner J, Zumer K (2004) Privatization of water in the UK and France-What can we learn? Utilities Policy 12(1):41–50

    Article  Google Scholar 

  • Dore M (2015) Water policy in Canada: problems and possible solutions. Springer, Berlin (in press)

    Google Scholar 

  • Dreze J, Stern N (1990) Policy reform, shadow prices, and market prices. J Public Econ 42(1):1–45

    Article  Google Scholar 

  • Dupuit J (1854) Traite theÂorique et pratique de la conduite et de la distribution des eaux (Practical Treatise of the pipe and water distribution). De Lacroix-Cornon, Paris

    Google Scholar 

  • EC Water Framework Directive 2000/60/EC (2000) http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32000L0060. Accessed 4 July 2014

  • Forfas (2008) Assessment of water and waste water services for enterprise-the national policy and advisory board for enterprise, Trade, Science, Technology and Innovation, http://www.envirocentre.ie/includes/documents/forfas080902_water_waste_water.pdf. Accessed 13 March 2014

  • García-Valiñas M, González-Gómezc F, Picazo-Tadeo A (2013) Is the price of water for residential use related to provider ownership? Empirical evidence from Spain. Utilities Policy 24:59–69

    Article  Google Scholar 

  • Guesnerie R (1994) A contribution to the pure theory of taxation, 1st edn. Cambridge University Press, Cambridge

    Google Scholar 

  • Hart O, Shleifer A, Vishny R (1997) The proper scope of government: theory and an application to prisons. Quart J Econ 112:1127–1161

    Article  Google Scholar 

  • Hotelling H (1938) The general welfare in relation to problems of taxation and of railway and utility rates. Econ J Econ Soc 6:242–269

    Google Scholar 

  • Hrovatin N, Bailey S (2001) Implementing the European Commission’s water pricing communication: cross-country perspectives. Utilities Policy 10(1):13–24

    Article  Google Scholar 

  • Huizinga H, Nielsen S (2001) Privatization, public investment, and capital income taxation. J Public Econ 82:399–414

    Article  Google Scholar 

  • Hunt C, Staunton J, Dunstan K (2013) Equity tension and new public management policy development and implementation in the water industry. Acc Auditing Accountability J 26(8):1342–1377

    Article  Google Scholar 

  • Ireland Department of the Environment, Heritage and Local Government (DoEHLG) (2010). Report of the Local Government Efficiency Review Group. http://www.environ.ie/en/LocalGovernment/LocalGovernmentEfficiencyReviewGroup/. Accessed 12 March 2014

  • Kahn A (1970) The economics of regulation: principles and institutions vol. 1, 2. Wiley, New York

    Google Scholar 

  • Keynes J (1981) In: Moggridge D (ed) The collected writings of John Maynard Keynes. Cambridge University Press, Macmillan

    Chapter  Google Scholar 

  • Laffont J, Tirole J (1991) Privatization and incentives. J Law Econ Organ 7:84–105

    Article  Google Scholar 

  • Lipsey R, Lancaster K (1956) The general theory of second best. The Rev Econ Stud 24:11–32

    Google Scholar 

  • Little I, Mirrlees J (1974) Project appraisal and planning for developing countries, 1st edn. Heinemann Educational, London

    Google Scholar 

  • Mirrlees J (1971) An exploration in the theory of optimal income taxation. Rev Econ Stud 38:175–208

    Article  Google Scholar 

  • OCWA (Ontario Clean Water Agency) (2011). Annual Report 2011-A trusted world leader in water. http://www.ocwa.com/sites/all/themes/ocwa/pdf/2011_AnnualReport_EN.pdf. Accessed 2 March 2014

  • OECD (Organization for Economic Co-operation and Development) (2010). Pricing Water Resources and Water and Sanitation Services. OECD, Paris

    Google Scholar 

  • Overcast H (2012) Is it time for water utilities to rethink pricing? J Am Water Works Assoc 104(6):59–62

    Article  CAS  Google Scholar 

  • Porcher S (2014) Efficiency and equity in two-part tariffs: the case of residential water rates. Appl Econ 46(5):539–555

    Article  Google Scholar 

  • Ramsey F (1927) A contribution to the theory of taxation. Econ J 37(145):47–61

    Article  Google Scholar 

  • Ramsey F (1928) A mathematical theory of saving. The Econ J 38:543–559

    Google Scholar 

  • Renzetti S (1999) Municipal water supply and sewage treatment: costs, prices, and distortions. Canadian J Econ 32(3):688–704

    Article  Google Scholar 

  • Rogers P, Silva R, Bhatia R (2002) Water is an economic good: How to use prices to promote equity, efficiency, and sustainability. Water Policy 4(1):1–17

    Article  Google Scholar 

  • Schmidt K (1996) Incomplete contracts and privatization. Eur Econ Rev 40:569–579

    Article  Google Scholar 

  • Shapiro C, Willig R (1990) Economic rationales for the scope of privatization. In: Suleiman EN, Waterbury J (eds) The political economy of private sector reform and privatization. Westview Press, Boulder, CO

    Google Scholar 

  • Stiglitz J (1989) Imperfect Information in the Product Market. In: Schmalensee R, Willig R (eds) Handbook of industrial organization. Elsevier Science Publishers, Amsterdam, pp 771–847

    Google Scholar 

  • USEPA (United States Environmental Protection Agency) (2009). 2006 Community Water System Survey. Office of Water. EPA 815-R-09-001

    Google Scholar 

  • Wiegard W (1980) Distortionary taxation in a federal economy. Zeitschrift fuer Nationaloekonomie 40:183–206

    Google Scholar 

  • Zieburtz B, Giardina R (2012) Principles of water rates, fees, and charges (M1). American Water Works Association, Denver, CO

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Economics, Climate Change Lab Brock University, St Catharines, ON, Canada

    Mohammed H. Dore

Authors
  1. Mohammed H. Dore
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Mohammed H. Dore .

Rights and permissions

Reprints and permissions

Copyright information

© 2015 Springer International Publishing Switzerland

About this chapter

Cite this chapter

Dore, M.H. (2015). The Theory of Water and Utility Pricing. In: Global Drinking Water Management and Conservation. Springer Water. Springer, Cham. https://doi.org/10.1007/978-3-319-11032-5_5

Download citation

Publish with us

Policies and ethics

Search

Navigation