Water tariff setting and its welfare implications: Evidence from cities in the People’s Republic of China

College

School of Economics

Department/Unit

Economics

Document Type

Text Resource

Publication Date

5-2019

Abstract

We develop a framework to analyze urban water tariff setting and its welfare implications and apply it to a panel of cities in the People’s Republic of China in the 2000s. First, we find that peer cities’ water tariff levels have a significant influence on a city’s choice of tariffs. We use the peer cities’ average tariff as an instrumental variable to estimate water demand functions, which yields elasticity estimates of around – 0.41 for both residential and industrial sectors. Second, estimation of cost functions reveals the supply of urban water services to be characterized by strong economies of scale with the majority of sample city– years on the downward sloping segment of marginal cost curves. More than half of the sample have residential water tariffs higher than the corresponding marginal costs while the share increases to 71% for the industrial sector. The deadweight loss calculated under first-best pricing suggests moderate welfare loss due to prices deviating from the equilibrium. Finally, we show that taking into account nonrevenue water losses justifies an efficient price higher than the equilibrium price.

html

Digitial Object Identifier (DOI)

10.22617/WPS190159-2

Disciplines

Water Resource Management

Series Title

ADB economics working paper series ; no. 580

Keywords

Water utilities—Rates—China

Upload File

wf_no

This document is currently not available here.

Share

COinS