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Cost Recovery, Efficiency, and Economic Organization for Water Utilities
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Citation Information: Contributions in Economic Analysis & Policy. Volume 3, Issue 1, Pages –, ISSN (Online) 1538-0645, DOI: 10.2202/1538-0645.1232, September 2004
- Published Online:
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.