Consumer Demand and Welfare under Increasing Block Pricing

This paper argues that an increasing block pricing structure needs to be supplemented by allowances for household size and composition to be equitable. Household behaviour is modelled as the outcome of a two-stage budgeting resulting in an integrable water demand model. The welfare effects of block pricing are studied using the concept of relative equivalence scale, modified to allow for the dependence of price on household size and composition. We use individual household data to estimate residential demand for water, provide empirical illustration of the welfare effects of increasing block pricing on demographically different households and show how these effects can be compensated.