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Abstract
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.