Desperately Seeking θ's: Estimating the Distribution of Consumers Under Increasing Block Rates

Abstract

This paper shows that increasing block rate pricing schedules usually applied by water utilities can reduce the efficiency and equity levels. To do this, we first present a two step method to estimate the demand and to recover the distribution of consumer tastes when increasing block rate pricing is used. We show that in this case the tariff induces a pooling equilibrium and customers with different taste parameters will be observed to choose the same consumption level. Second, we show that a two-part tariff that neither reduces the revenue for the firm nor increases the aggregate level of water consumption increases the welfare and equity levels in relation to an increasing block rates schedule.

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Castro-Rodríguez, F., María Da-Rocha, J. & Delicado, P. Desperately Seeking θ's: Estimating the Distribution of Consumers Under Increasing Block Rates. Journal of Regulatory Economics 22, 29–58 (2002). https://doi.org/10.1023/A:1019951702523

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Keywords

  • Water Consumption
  • Public Finance
  • Industrial Organization
  • Aggregate Level
  • Consumption Level