In drought years, most residents fail to improve water use efficiency due to residential water supply normally being prioritized in many regions, which makes other low-priority industrial water users suffer more from water shortage. This paper proposes a Pricing Strategy for Residential Water (PSRW), a water tariff that changes on annual time scale, based on the scarcity value of water resources, aiming to promote residential water conservation and reallocate water resources across the residential and industrial sectors during droughts. An optimization model to maximize the total benefit of residents and industrial sectors is introduced based on marginal benefit and price elasticity. The water shortage of industrial sectors is used to reflect the scarcity of water resources, and the lowest water supply standard for households and the maximum proportion of household water fee expenditure (HWFE) to household disposable income (HDI) are used to ensure the residents’ acceptability to price raising. It shows an “S-type” relationship between the optimal price raising coefficient and industrial water shortage, and two turning points are found in the curve, which are the starting and stopping points of price raising. The appearance of starting point depends on the non-negative net benefit, and the stopping point is affected by the factors that represent the residents’ acceptability to price raising. The application to Tianjin, a city in northern China with the rapid growth of population and economy but scarce water resources, shows PSRW is a potential means to improve water efficiency and optimize water resource allocation in water scarcity situations.
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