Efficiency and Equity in Two-Part Tariffs: The Case of Residential Water Rates

Efficiency and Equity in Two-Part Tariffs: The Case of Residential Water Rates
Simon Porcher (IAE Paris)
Abstract: As first noticed by Coase (1946), a standard result in utility regulation is that efficiency requires two-part tariffs with marginal prices set to marginal costs and fixed fees equal to each customer’s share of fixed costs.
Residential water customers in France face marginal prices for water that average about 8% more than marginal costs. Rebalancing rates from current tariffs to Coasian tariffs results in lower bills for consumers on average but does create strong distributional consequences. Under price elasticity estimates that are consistent with previous results in the literature, efficiency costs represent around 8million euros of welfare losses for 2008. Even though the impact is fairly small, efficiency gains from reformed tariffs could be used to fund water assistance programs focused on financially stressed households.