Increasing Block Tariffs in the Water Sector: A Semi-Welfarist Approach

Abstract

We analyze the properties of progressive water tariffs that are often applied in the sector in the form of discretely increasing block tariffs (IBT). We are particularly interested in water tarification in a poverty context where a subsistence level of water has to be allocated to each household. Our approach is "semi-welfarist" to the extent that we analyze second-best pricing schemes that may be applied in practice due to "fairness" or other, non-welfarist considerations. In our theoretical model we compare a modified Coase-tariff and a progressively increasing block tariff with respect to water consumption, water expenses and utility levels. When we impose cost coverage on the water utility, there are clearly adverse effects on the "almost poor" by introducing a progressive tariff. This result is supported with a numerical application using real data from Bangladesh: progressive tariffs may fail to achieve "fair" cross-subsidization of low-income groups.