THE EFFICIENCY AND EQUITY IMPLICATIONS OF PERTH’S INCLINING BLOCK URBAN WATER TARIFFS

Inclining block tariffs, where the unit price is dependent on the volume consumed, are widely used in urban water pricing. These tariffs attempt to satisfy both efficiency and equity goals by providing pricing signals to influence consumption decisions at the margin, whilst making non-discretionary consumption available at a lower cost. In practice, heterogeneity in demand and the water utility’s requirement for cost recovery lead to efficiency and equity trade offs in the design of inclining block tariff schedules. An equilibrium displacement model of Perth residential water demand, which differentiates between consumer groups according to household size and outdoor use characteristics, is used to assess the efficiency and equity implications of the inclining block tariffs charged by the Water Corporation in Western Australia. Alternative pricing options, including a modified inclining block proposal that has recently been recommended by the state economic regulator and an efficient uniform price, are also evaluated. The efficiency costs and income distributional consequences of “over generous” inclining block tariffs are demonstrated.