FEEM working papers "Note di lavoro" series
2007 .092

Welfare and Distribution Effects of Water Pricing Policies


Authors: Arjan Ruijs
Series: Climate Change and Sustainable Development
Editor: Carlo Carraro
Type: Journal
Keywords: Water Demand,Welfare Economics,Equivalent Variation
JEL n.: D63,Q25,Q56
JEL: Environmental and Resource Economics
Pages: Vol. 43, No. 2, pp. 161-182
Date: 06/2009

Abstract

In this paper, distribution and welfare effects of changes in block price systems are evaluated. A method is discussed to determine, for a Marshallian demand function, equivalent variation in case of a block price system. The method is applied to analyze welfare and distribution effects of changing water prices in the Metropolitan Region of São Paulo. Results show that there is a trade off between average welfare and income distribution. A pro-poor price system may result in lower average welfare than a flat price system, but in higher individual welfare for the poor. Moreover, there is a trade off between revenues for the water company and income distribution. Even though pro-poor price systems may not be as good for average welfare as flat price systems, their direct effects on poverty are important. Introducing pro-poor price systems, however, may have financial consequences for the water companies.

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