14 Jul 2014

Another blow against IBRs

Hugh Sibly published a paper which "suggests that IBTs [Increasing Block Tariffs] are neither fair nor efficient." Given my agreement, I asked for more detail and got this:
I started thinking about IBT/Rs when they were proposed as a solution to the water shortage during the "Millennium drought" here in Australia. Of course they were no such thing.

I think the simple and efficient way to price water is using a two part tariff when a variable volumetric rate which incorporates a 'scarcity' price. In Australia water utilities must make a normal rate of return, so the fixed charge can be varied to ensure that. Fairness issues are always raised here when one talks about pricing, so I've argued the best way to ensure that is to give the disadvantaged a discount off the (or even a negative) fixed charge.

The important thing, of course, is to ensure the volumetric rate reflects the scarcity of water. To economists this line of reasoning is, well, obvious. But there is a lot of resistance to it here, as so many people think IBR/Ts are a good (fair) form of pricing.
In this similar paper you'll find arguments in support his conclusions such as this:
IBTs are easy to justify politically, because their implementation can be blamed on water hogs, who are punished by their introduction. But the real culprit for the water shortage is climatic variability, and the way in which the country’s water authorities plan for, and respond to, it. The implementation of IBTs is an attempt to allow water users to avoid confronting the implications of variability in water availability, and it allows many users escape the cost of their actions.


Invoking the concept of non-discretionary demand as a means of allocating water is problematic from an economic perspective. The distinction between discretionary and non-discretionary demand presumably relates to differences in the willingness to pay for different uses of water. For example, water used for showers (non-discretionary) would have a higher marginal benefit than water used to wash the car (discretionary). However, only consumers can identify their demand for the duration and frequency of given activities. An efficient volumetric rate allows consumers to make this choice. Water authorities targeting, and then restricting, activities declared ‘non-discretionary’ removes this choice from households, and thus may lead to an inefficient allocation of water across uses.
Read the whole thing, and then tell me if you still think increasing block rates lead -- or impede -- fairness and efficiency.

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