4 May 2009

Fixed and Variable Costs Redux

In this post on fixed and variable costs, I reconciled economic efficiency, political reality, and accounting into a logical and equitable rate system.

One thing that I did not make clear (I was confused too!) is this:
  1. Water bills should charge fixed costs (e.g., connection charge) on a PER METER basis.

  2. They should charge variable costs (e.g., water use) on a PER CAPITA basis. That means that the width of the lifeline water service block will depend on the number of people, e.g., 75 gallons/capita/day for two people leads to a lifeline block that is 150gal/day "wide." Subsequent blocks can also reflect the number of people, but the price of each block will be the same for ALL households.

  3. "Excess" revenue that would result if prices in top tiers were high enough should be rebated PER CAPITA.
This is an important clarification, since it seemed as if I wanted to charge fixed costs per capita and then rebate per capita. That's not right (either economically or socially), so I am providing this clarification.

Bottom Line: Suitably-structured water rates provide the right incentives. Most water rate structures are not suitable, and that's why we have water "shortages." Raise prices!


DW said...

Your solution depends on local water agencies knowing how many people are in each customer home and business. They simply don't know because they've never surveyed their customers in that manner.

David Zetland said...

@DW -- I consider that information WELL within an agency's capabilities and purview.

GFW said...

This might be an American question, but wouldn't customers just lie, reporting a greater number of residents?

David Zetland said...

@GFW -- yes, they might (very common excuse). Only data I saw (without any audits of what customers said by water company) gave 10% "lie" rate (headcount inflation). OTOH, Belgium uses this system with mandatory residency data = much less lying (b/c taxes go UP with headcount).

So more a problem of asking than the answers.

Xarli said...

What you think if the fix charge is also linked to the people "behind", in this case the different service charge would be an instrument to reduce "lie" rate.

It would make sense in the way you are beng granted wider blocks -in a perfect world- honestly linked to the number of beneficiaries.

David Zetland said...

@Xarli -- that's a really good idea, but it contradicts the goal of matching fixed revenues ($ charge per meter) to fixed costs (cost per connection in the system). So that's a tradeoff that has to be weighted. It may still favor your idea -- except now you have to worry that people will lie the OTHER way, if meter price is >> water price! :)

Ben Archibald said...

Hi David,

I think this has great merits, but could you comment further on any idea of a solution for accommodating the needs of larger households in, or close to poverty?

David Zetland said...

@Ben -- that's addressed by the cheap initial block with a size that depends on the number of residents.

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