Multiple Goals Dilemma of Residential Water Pricing Policy Reform: Increasing Block Tariffs or a Uniform Tariff with Rebate?

Abstract

Water is a basic necessity and its allocation and utilization, especially pricing policies, impose various social, economic, and ecological impacts on social groups. Increasing block tariffs (IBTs) has gained popularity because it is expected to incentivize water conservation while protecting poor people benefiting from the redistribution effects because of its nonlinear tariff structure. However, it results in price distortion under certain circumstances. Researchers have also proposed an alternative practical price system and a uniform tariff with rebate (UTR), with the price level set equal to the marginal social cost and a fixed rebate allocated to the poor groups. This study proceeds with a simulation of the two pricing systems, UTR and IBTs, and empirically explores their fundamental merits and limitations. The results confirm the theoretical perspective that a water price system, compared with an optimal tariff system, simultaneously achieves multiple goals to the greatest possible extent.