Multiple Goals Dilemma of Residential Water Pricing Policy Reform: Increasing Block Tariffs or a Uniform Tariff with Rebate?
Abstract
:1. Introduction
2. Policy Options and Simulation
2.1. Uniform Tariff with Rebate
- (1)
- Marginal social cost pricing rule. Jaeger et al. [19] define water scarcity as the marginal value of a unit of water on the demand curve. This definition of water scarcity is seen as fundamentally normative and anthropocentric. Water scarcity is a value concept that refers to the opportunity costs of forgone human options caused by insufficient water availability to fully satisfy all competing uses [20]. Beijing encounters water scarcity consistent with this definition. Because water availability was insufficient in Beijing in 2011, 7% of water demand was met by the South-to-North Water Diversion Project (SNWDP) [21]. The unit cost of delivering one ton of water to Beijing can be regarded as the opportunity cost that society pays for the delivery. So, the investments for other purposes may be crowded out, and the output values of these investments may be reduced.Specifically, the opportunity cost can be regarded as the marginal cost for the increase in water demand, and it includes both marginal production cost and marginal user cost (it is not possible to separate these two kinds of cost from the whole cost (7.00 RMB/m3)). The cost level is 7.00 RMB/m3 (1.11 US$/m3) (RMB is the Chinese currency; the exchange rate is 6.3 RMB per dollar in 2011) [22]. As the adoption of the new techniques to reduce the negative externalities increased the cost of sewage treatment, the current sewage treatment cost rose to 1.71 RMB/m3 (0.27 US$/m3), which we approximate as the marginal cost of negative externalities by wastewater discharge [23]. Therefore, the marginal social cost is 8.70 RMB/m3 (1.38 US$/m3) (including marginal production cost, marginal user cost, and cost of negative externalities by wastewater discharge). Moreover, as there is no accurate and real data available to allow us to determine the marginal social cost curve of water service, we assume the marginal social cost being equal to 8.70 RMB/m3 (1.38 US$/m3) has been unchanged over time.
- (2)
- Rebate mechanism. Rebates are generally assigned on the basis of eligibility criteria presumed to have a strong correlation with poverty. The eligibility criteria refer to the rebate provided to low-income households whose water expenditures for basic needs exceed the standard of economic affordability. The related question is how to define basic needs, affordability, and low-income households.
- (a)
- Basic needs. Reed [24] defined the minimum water quantity needed physiologically and set a per capita consumption of 25 L/day as the minimum consumption for survival. We argue it is not appropriate to follow this standard, because the basic needs should be related to a social attribute in an economic study. According to our survey sample, 20% of residents consume less than 2.0 m3/month, and 50% less than 2.5 m3/month. We propose per capita 2.0 m3/month and 2.5 m3/month as the respective minimal and maximal standards for minimal basic needs.
- (b)
- Affordability criterion. We follow the criterion suggest by Smita [25] that if water expenditure share exceeds 3%, the poor are discouraged from using the amount of water for basic needs.
- (c)
- Rebated objects (definition of low-income household). Means-tested programs are conducted by Beijing Civil Affairs Bureau [26] to identify and enroll low-income households. The urban poor is defined as those whose per capita income is less than 480 RMB/month (76.2 US$/month) by the Beijing Civil Affairs Bureau. These households are eligible to apply for rebate, that is, if their water expenditure share for basic needs is defined as greater than 3%, the government should provide a rebate of 3%.
2.2. Increasing Block Tariffs
- (1)
- Initial block. The initial block is related to fairness and is a rebate mechanism of UTR to assure affordability for basic needs that includes block size and rate.
- (a)
- Block size. The block size should avoid being oversized or it allows all consumers (i.e., poor and wealthy households) to be heavily subsidized and to take advantage of infrastructure services. For equal consideration with UTR, we select per capita 2.0 m3/month and 2.5 m3/month as the respective minimal and maximal size of the initial block as a lifeline block.
- (b)
- Block rate. The initial block rate should be set sufficiently low to achieve affordability paired with its block size. Additionally, for political acceptability, we suggest not exceeding the current price [4.00 RMB/m3 (0.63 US$/m3)]. Thus, we simulated two rates: 3.00 RMB/m3 (0.48 US$/m3) and 4.00 RMB/m3 (0.63 US$/m3). Under both rates, the average expenditure share for the basic needs (the consumption at the initial block) of each income group is less than 3% (the income groups’ segmenting is presented in Section 3).
- (2)
- Rate differentiation between blocks. We start with a two-block tariff simulation. The rate differentiation between the initial block and the second block should be designed to realize two goals: The first goal is that the rate differentiation encourages water conservation for the households with luxurious use and that are sensitive to price change. The second goal is that the rate differentiation charges a greater fee for use in the second block (i.e., the price level is higher than the marginal social cost) to compensate the lower charge for basic needs in the initial block (i.e., the price level is lower than the marginal social cost). We simulated a band of two-block tariff structures with the rate range of the second block from 10.0 RMB/m3 (1.58 US$/m3) to 25.0 RMB/m3 (3.97 US$/m3).
- (3)
- Number of blocks. Additional blocks can further classify luxurious consumption (e.g., a smaller amount of water use for breeding small animals, and a larger amount for garden irrigation or car washing) and charge differently. For example, when turning two-block tariffs into three-block tariffs, by retaining the size and rate of the initial block (assuring affordability), the second block can be extended into two new blocks forming three-block tariffs: lowering the rate of the second block to a new level at the rate of the second block of the three-block tariffs, and increasing the rate of the second block to another new level at the rate of the third block of the three-block tariffs.Increasing the number of blocks mainly influences the pattern of cost sharing between the wealthier households. A design with additional blocks may increase the cognitive cost to understanding the tariff structure that may induce people to respond to other types of rates, rather than the marginal rate of increasing block tariffs [17,18]. If people do not respond to the marginal rate, it would weaken the efficacy of the “increasing block,” and we consider efficacy a priority in our research. Thus, in this study, we only extend the structure design to three-block tariffs.
- (4)
- Size of the second block. As the block size of the second block is associated with moderate luxurious use, its amount is approximately a maximum per capita 1.0 m3/month in Beijing based on the statistics. Thus, the size of the second block in the three-block tariff structure is set equal to 1.0 m3/month.
3. Methodology and Data
3.1. Demand System for Household Water Use
3.2. Assessment of Policy Performances on Multiple Goals
- (1)
- Affordability (fairness). We compute water expenditure shares of different income groups as the indicator of affordability under each simulated price structure and compare them with the maximum value of 3%, as proposed by Smita [25].
- (2)
- Economic efficiency. We use deadweight to measure economic efficiency loss under the assumption that the marginal social cost [8.70 RMB/m3 (1.38 US$/m3)] is unchanged over the consumption of households (hence, the marginal social cost equals the average cost).
- (3)
- Concern for other negative externalities. Water usage may induce the damage of local ecosystems and negative externalities related to hedonic values, such as fisheries, tourism, and recreation. Notably, concerns may be raised regarding valuation techniques, such as double counting benefits [36] that make the evaluation difficult and increase bias. The evaluation for this concern is out of the scope of this study. We adopted per capita water consumption as a proxy variable to approximately indicate the relative impact on this aspect, that is, the tariff structure encouraging greater water conservation imposes fewer negative externalities.
- (4)
- Redistributional impact on welfare of households. Any major water price reform has income redistributional effects on the welfare of individual consumers, that is, there will be winners and losers; therefore, considering how to manage potential hardships caused by the water price reform is necessary. We examine how the tariff structure switch, that is, from UTR to the various IBTs, would affect households in different income brackets. Specifically, we derive estimates of the welfare redistribution effected, that is, the CV of different income brackets, based on the change of tariff structures.
3.3. Data Sources
4. Empirical Results
4.1. The Regression Results of QUAIDS
4.2. Comparing IBTs with UTR
- (1)
- Affordability (fairness). We observe in Figure 3 that average water expenditure shares in the lower income groups are generally less than in the higher income groups, and all income groups are less than the 3% criteria across all IBTs. The water expenditure share of the lowest income group is 5.5% and charged at a marginal social cost, indicating an overburden on low-income households and they deserve a rebate. The amount of the rebate is on average 8.0 RMB/month per capita. Notably, to make rebates feasible, a system must be established and the rebate program must be commensurate with the available funding to fulfill its intended affordability objective. Thus, the program’s administrative costs must be considered.
- (2)
- Economic efficiency. Achievement of fairness by IBTs is at the cost of economic efficiency loss. A utility would have to impose a rate greater than the marginal social cost on higher income users while offering a lower rate to low-income users. The standard efficiency argument requires setting the price level equal to the marginal social cost for all users, which clearly indicates that the increasing block tariff structure distorts the relative marginal prices that different customers incur. This study reported the magnitude of economic efficiency loss by price distortion A-18, B-16, and C-21, with a marginal price lower than the marginal social cost for the first block and a marginal price higher than the marginal social cost for the second block. The results showed the deviation from the social welfare achieved by UTR is per capita 0.42, 0.34, and 0.51 RMB/month (0.07, 0.05, and 0.08 per capita US$/month) for A-18, B-16, and C-21, respectively.
- (3)
- Concern for other negative externalities. We expected the rate differentiation of IBTs to encourage greater water conservation in contrast to UTR; however, we observed that the evidence is inconsistent with the supposition that UTR (2.80 per capita m3/month of water consumption) induces a greater incentive to conserve water than B-16 (2.95 per capita m3/month) and A-18 (2.82 per capita m3/month). This result may be partially attributed to the majority of households responding to the average price, rather than marginal price. And this attribution implies that households treat IBTs as increasing linear tariffs (in this tariff structure, the price a household pays increases continuously as the quantity of water used increases). Thus, this tariff structure may not incentivize water conservation that exerts discrete choice across blocks under IBTs as powerfully as expected [18], because the price differentiation between the current unit and the decrease in additional units varies much less than the rate differentiation between blocks. This result leads us to question the justification for using IBTs as the best pricing system for water conservation.
- (4)
- Redistributional impact on household welfare. We observe that the switch from UTR to the various IBTs substantially redistributes welfare to lower income groups (i.e., the three lowest income groups), and consumer welfare in terms of currency increased per capita by greater than or equal to 5 RMB/month (0.82 US$/month; Figure 4, Figure 5 and Figure 6). Households in the lowest income group benefit most from implementing IBTs, because the rate of the initial block is far less than the marginal social cost, and their substantial consumption located at the initial block associated with basic needs has little variability in relation to price change. The largest transfer occurs in the wealthiest households, decreasing the welfare of households by greater than per capita 7 RMB/month (1.14 US$/month) for all IBTs. Additionally, a much greater share of the redistributed revenue is from the wealthier quintile of households because of more progressive IBTs. Widening the rate differentiation between the initial and second blocks is the impetus for heavier cross-subsidies across income groups and spreads the contribution burden more unevenly among the wealthy households.
5. Conclusions and Policy Implications
Author Contributions
Funding
Acknowledgments
Conflicts of Interest
References
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Serial Number | 1F | 2F | 1P | 2P | 3P |
---|---|---|---|---|---|
A-18 | 2 | - | 3.00 (0.48) | 18.00 (2.86) | - |
B-16 | 2 | - | 4.00 (0.63) | 16.00 (2.54) | - |
C-21 | 2.5 | - | 4.00 (0.63) | 21.00 (3.33) | - |
A-25 | 2 | 3 | 3.00 (0.48) | 14.00 (2.22) | 25.00 (3.97) |
B-23 | 2 | 3 | 4.00 (0.63) | 12.00 (1.90) | 23.00 (3.65) |
C-32 | 2.5 | 3.5 | 4.00 (0.63) | 17.00 (2.70) | 32.00 (5.08) |
Goals | Variables | Description of How to Compare UTR and IBTs |
---|---|---|
Equity (affordability) | Water expenditure share | Comparing water expenditure share |
Economic efficiency (excludes the costs of other negative externalities) | Social welfare | Comparing social welfare a |
Concern for other negative externalities (which cannot be monetized) | Per capita water consumption | Comparing per capita water consumption |
Redistributional impact | Compensating variation | Compensating variation of different income groups when tariff structure switches b |
Income Group | 1 | 2 | 3 | 4 | 5 | 6 | 7 |
---|---|---|---|---|---|---|---|
Disposable Income a | 366 (58) | 935 (148) | 1682 (267) | 2506 (397) | 3582 (568) | 5790 (919) | 11,486 (1823) |
Water Consumption b | 2.4 | 3.1 | 3.0 | 3.3 | 3.6 | 3.5 | 4.0 |
Income Group | 1 | 2 | 3 | 4 | 5 | 6 | 7 |
---|---|---|---|---|---|---|---|
0.22 (0.00) *** | 0.32 (0.00) *** | 0.21 (0.00) *** | 0.22 (0.00) *** | 0.24 (0.00) *** | 0.18 (0.00) *** | 0.17 (0.00) *** | |
0.04 (0.00) *** | 0.07 (0.00) *** | 0.04 (0.00) *** | 0.04 (0.00) *** | 0.05 (0.00) *** | 0.03 (0.00) *** | −0.03 (0.00) *** | |
−0.006 (0.00) *** | −0.01 (0.01) *** | −0.007 (0.00) *** | −0.007 (0.00) *** | −0.002 (0.00) *** | −0.005 (0.00) *** | 0.001 (0.16) | |
−0.002 (0.00) *** | −0.004 (0.00) *** | −0.002 (0.00) *** | −0.002 (0.00) *** | 0.001 (0.00) *** | −0.001 (0.00) *** | 0.001 (0.00) *** | |
(billing frequency) | 0.0006 (0.49) | −0.0008 (0.58) | −0.001 (0.13) | 3.89 × 10−6 (0.99) | 0.0003 (0.53) | −0.0001 (0.78) | 0.00008 (0.90) |
(household size) | 0.004 (0.00) *** | 0.003 (0.00) *** | 0.004 (0.00) *** | 0.004 (0.00) *** | 0.002 (0.00) *** | 0.002 (0.00) *** | 0.002 (0.00) *** |
(whether has elders) | 0.0001 (0.67) | −0.0007 (0.22) | −0.0001 (0.71) | 0.0001 (0.71) | −0.0001 (0.61) | 0.0003 (0.10) | 0.0001 (0.58) |
(whether has children) | −0.0005 (0.15) | −0.0002 (0.73) | 0.0005 (0.07) * | −0.0002 (0.38) | −0.0001 (0.64) | 0.0002 (0.37) | −0.00009 (0.74) |
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Ma, X.; Wu, D.; Zhang, S. Multiple Goals Dilemma of Residential Water Pricing Policy Reform: Increasing Block Tariffs or a Uniform Tariff with Rebate? Sustainability 2018, 10, 3526. https://doi.org/10.3390/su10103526
Ma X, Wu D, Zhang S. Multiple Goals Dilemma of Residential Water Pricing Policy Reform: Increasing Block Tariffs or a Uniform Tariff with Rebate? Sustainability. 2018; 10(10):3526. https://doi.org/10.3390/su10103526
Chicago/Turabian StyleMa, Xunzhou, Dan Wu, and Shiqiu Zhang. 2018. "Multiple Goals Dilemma of Residential Water Pricing Policy Reform: Increasing Block Tariffs or a Uniform Tariff with Rebate?" Sustainability 10, no. 10: 3526. https://doi.org/10.3390/su10103526