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date: 26 September 2022

An Assessment of the Widespread Use of Increasing Block Tariffs in the Municipal Water Supply Sectorlocked

An Assessment of the Widespread Use of Increasing Block Tariffs in the Municipal Water Supply Sectorlocked

  • Dale WhittingtonDale WhittingtonGillings School of Global Public Health, University of North Carolina at Chapel Hill
  •  and Céline NaugesCéline NaugesToulouse School of Economics and French Institute for Research in Agriculture

Summary

The design of municipal water tariffs requires balancing multiple criteria such as financial self-sufficiency for the service provider, equity among customers, and economic efficiency for society. Globally, various forms of water tariffs are in use (e.g., tariffs based on fixed or volumetric charges, single and two-part tariffs, and increasing or decreasing block tariffs) but increasing block tariffs (IBTs) have become popular worldwide over the last few decades for two main reasons. Apart from the fact that IBTs incentivize households to save water by charging large volumes at a higher price, there is a widespread belief that IBTs are pro-poor. The latter would be the consequence of providing all households with a minimum amount of water at a low (subsidized) price while large water users pay higher prices. However cross-subsidization between wealthy and poor households will occur only if poor households’ consumption falls in the low (subsidized) block and if rich households consume in the higher block and pay a price that is above the average cost of supply. These two conditions are rarely met in reality and IBTs often fail to allocate subsidies to the poor effectively. There are a few examples of water utilities making adjustments to the tariff to take into account that poor households with large families are likely to be adversely affected by IBTs. However, the provision of a minimum amount of water for free (as in South Africa), the design of household-specific low-cost water allowances (as in California), or tariffs being adjusted based on household size do not usually improve the targeting of subsidies to the poorest households. The widespread use of IBTs is difficult to rationalize, in particular while knowing that the use of a (simple) uniform volumetric tariff where water provision is charged at its full cost could improve social welfare by removing price distortions and would be easier for households to understand than IBTs. This simple tariff could be combined with some consumer assistance programs to help the poorest households pay their bills.

Subjects

  • Public Health Policy and Governance

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