How should urban water be priced? - An empirical analysis for the city of Mekelle, Ethiopia

Urban water utilities have focused on setting water prices to cover average costs, usually using increasing block rate designs. In an attempt to contribute to the use of efficient, equitable, and revenue-sufficient pricing, this paper estimates the long-run marginal and average social costs of water...

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Bibliographic Details
Published in:Urban water journal 2017-04, Vol.14 (4), p.409-415
Main Authors: Gezahegn, Tafesse W., Zhu, Xueqin
Format: Article
Language:English
Subjects:
Costs
Design analysis
Economic models
Economies of scale
Empirical analysis
Estimates
Marginal social cost
marginal value
Mekelle
natural water
Pricing
Shadow prices
Shadows
Social costs
translog cost function
Water supplies
Water utilities
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Summary:Urban water utilities have focused on setting water prices to cover average costs, usually using increasing block rate designs. In an attempt to contribute to the use of efficient, equitable, and revenue-sufficient pricing, this paper estimates the long-run marginal and average social costs of water supply in Mekelle city using a multi-product translog cost function that incorporates the shadow price of natural water. Findings show that the marginal social costs of providing one m 3 of residential and non-residential water are Birr 5.33 and 7.71 (Birr = Ethiopian currency: 1 Euro ≈ 23 Birr), respectively, while the average current prices are Birr 4.46 and 6.10/m 3 . On the other hand, the average social costs of residential and non-residential water are estimated at Birr 14.34 and 16.36/m 3 , respectively, implying that marginal social cost-based prices would still lead to a revenue deficit of approximately Birr 9/m 3 .
ISSN:1573-062X
1744-9006
DOI:10.1080/1573062X.2016.1175484