Cost Recovery, Efficiency, and Economic Organization for Water Utilities

Abstract

Abstract 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.