This paper describes a new method of utility pricing Variable Unit Pricing (VUP) that results in both economic efficiency and cost recovery for a variety of supply situations faced by water utilities. The main advantage of VUP compared to Increasing Block Rates is that its parameters can be objectively determined from demand and cost information.The theoretical support for VUP is a welfare economics paradigm that integrates pricing with economic organization. VUP is shown to achieve social efficiency for a fixed-fee contractual arrangement between a profit-maximizing water utility and a public agency.Public involvement is required to express equity concerns, demand for public goods such as water quality and security, and to identify appropriate supply limits for conservation.
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