Abstract
This paper examines the pricing strategy of water services relative to marginal cost and second-best pricing rules, which is a principal concern of utility commissions. The water utility is viewed as a multiproduct firm providing residential and nonresidential services, and a translog multiproduct cost function is estimated for a cross section of U.S. water utilities. Marginal costs are estimated and combined with demand elasticities to simulate second-best prices for water services. Results show that while the existing price structure is quite different from the one suggested by marginal costs, it does not depart substantially from the second-best optimum.
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The research underlying this paper was supported by a cooperative agreement grant from the U.S. Environmental Protection Agency. The author would like to thank Robert Clark, Richard Stevie, Haynes Goddard, John Wassom, Philip Fanara and Curt Grimm for helpful comments and suggestions, and Pat Pearson who prepared many drafts of this paper. Special thanks go to referees for their comments and suggestions to improve the paper.
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Kim, H.Y. Marginal cost and second-best pricing for water services. Rev Ind Organ 10, 323–338 (1995). https://doi.org/10.1007/BF01027078
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DOI: https://doi.org/10.1007/BF01027078