Original Research

Water pricing reform, economic welfare and inequality

Mikko Moilanen, Carl-Erik Schulz
South African Journal of Economic and Management Sciences | Vol 5, No 2 | a2680 | DOI: https://doi.org/10.4102/sajems.v5i2.2680 | © 2018 Mikko Moilanen, Carl-Erik Schulz | This work is licensed under CC Attribution 4.0
Submitted: 09 July 2018 | Published: 30 June 2002

About the author(s)

Mikko Moilanen, Department of Economics, University of Tromsø, Norway
Carl-Erik Schulz, Department of Economics, University of the Western Cape, South Africa

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Abstract

Access to water has become an important policy goal in South Africa. A tariff system including free access for the basic residential water supply, and an increasing block tariff has been introduced all over the country. Water is a necessity, but for most households the marginal consumption is used for less important options. This must be reflected both in the water demand and in the pricing policy. This article introduces three different welfare functions, all including a group of rich consumers and a group of poor ones. The standard additive utility welfare, the weighted utility welfare and the Rawlsian welfare function are all used. For each of them the block tariff system is used to find the maximum welfare. We also discuss how the 'water for free' policy affects welfare, and how to set a low price segment or a free amount of water and the block tariff in each case. For each tariff system we also do comparative statistics of the parameters to study how changes in the policy approach will influence the optimal water tariff system. In conclusion the article explains how the choice of pricing policy can reflect the underlying welfare considerations.

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Crossref Citations

1. WATER DEMAND AND THE URBAN POOR: A STUDY OF THE FACTORS INFLUENCING WATER CONSUMPTION AMONG HOUSEHOLDS IN CAPE TOWN, SOUTH AFRICA
Ada Jansen, Carl‐erik Schulz
South African Journal of Economics  vol: 74  issue: 3  first page: 593  year: 2006  
doi: 10.1111/j.1813-6982.2006.00084.x