14 May 2012

Cost recovery versus conservation incentives

MV writes with this description of his water bill:
Calculating over the last five years and including taxes, VAT, and the connection, I paid about EUR 3.66 per m^2. (The water price is EUR 1.26 m^2, so EUR 2.44 is administrative crap/overhead.) I do not use a lot of water, so I pay an awful lot for the water I use. There is no incentive to use very little water. There is just a small incentive to not use an awful lot of water.
This is a good description of two factors. First, of the importance of fixed costs in a water system. Second, of the small importance of variable costs for reducing consumption. As I showed in Table 3 of my book [PDF], a higher variable price per unit of water (say EUR 3.00 per m^3 instead of EUR 1.26) would increase the incentive to conserve water without endangering revenue dedicated to fixed costs. The resulting surplus of fixed and variable revenues could be refunded, per person, to reward people who use less water. This post has more details, but remember that a higher variable price does NOT need to include any sort of increasing block rate structure.


ron griffin said...

Neither this entry or the 2009 one underscores the role of water's or possibly infrastructure's shadow price in a socially proper assessment of variable costs -- a big oversight. Such shadow prices have crucial spatial and temporal variability, so we shouldn't just wave our hands and recommend higher prices of an ambiguous amount. In some places/times these opp. costs are actually zero and higher prices aren't commendable. When they are commendable, we should indicate that the needed increase in price is not an arbitrary thing.

Thanks for mentioning the unnec. imposition of increasing block rates. Yet the 2009 entry does discuss "lifeline" rates. I wish we could deemphasize (and eventually dispense with) the idea that water rates might be a useful instrument of welfare policy, so that rates can get to their prime duty. We don't saddle bread and fuel pricing with such baggage.

Gabriela Gamma said...

There was always a question in my mind about the desire of achieving consumption reduction since I watched a documentary filmed by a German TV channel (sorry, I do not have a link or reference): they were discussing how reducing the consumption by the end users actually increased the costs (the so called fixed costs on our bills) of maintaining the sewage system. Apparently, when the end consumers decided to use less water, the sewage system got so clogged that the plants had to use more water to clean them. Could this be true?

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