Marginal Cost Pricing: Is Water Different?

by John J. Boland, Johns Hopkins Univ, United States,

Document Type: Proceeding Paper

Part of: The Role of Social and Behavioral Sciences in Water Resources Planning and Management


The objectives of public utility pricing are generally acknowledged to include a desire for efficient allocation of community resources, equity in allocating cost shares, stable revenues adequate to operate the utility effectively and to insure continuity of service, simple and easily understood rates, and appropriate conservation of scarce resources. Among the policies required to achieve these goals is the adoption of marginal cost pricing, where all prices set by the utility reflect the marginal cost of the service offered. The central role of marginal cost pricing is illustrated by reviewing some specific policy goals. Among the reasons for adopting merginal cost-based water prices, the paper finds that marginal cost-based prices promote economic efficiency; they promote equity by eliminating marginal subsidies; they lead to simple, easily-understood rate designs; and they promote conservation of scarce resources. At the same time, there are equally clear reasons for not implementing this policy under certain conditions, and these are also discussed.

Subject Headings: Pricing | Water management | Water conservation | Water resources | Water supply systems | Social factors | Resource management | Revenues

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