How Do Residents Respond to Price under Increasing Block Tariffs? Evidence from Experiments in Urban Residential Water Demand in Beijing

Economic theory generally assumes that consumers respond to marginal price, which is the price of the last unit of goods consumed, when making economic decisions. However, this assumption may not hold for goods with multi-block rate schedules. This paper explores the effects of water price information on residents’ behaviors under increasing block tariffs. The empirical evidence from the study suggests the middle-income groups respond to average price, which is based on the price level given by total fees divided by total consumption. This evidence supports the hypothesis that the incremental block tariffs are actually treated the same as uniform pricing for the middle-income group, while the highest income group is not sensitive to price changes. On the contrary, residents of the two lowest income groups respond to marginal price and probably go further to compare prices of different blocks and set consumption at kink points of price schedules to achieve maximal welfare. This study also finds that a higher second block price promotes consumption at kink points, and increased payments in first block consumption lead to less incentive to induce discrete choice behavior. Copyright Springer Science+Business Media Dordrecht 2014