Water Prices and Other Inefficiencies in Water Markets Monday, April 3

How are water users charged?  Flat fee pricing Total cost of 100 gallons is the same as total cost of 10 gallons Total cost of 100 gallons is the same as total cost of 10 gallons  Flat rate pricing Priced on a per unit basis; 100 th unit costs the same as the 10 th unit Priced on a per unit basis; 100 th unit costs the same as the 10 th unit  Average cost pricing Total operating costs divided by number of units used (e.g. cost per gallon) Total operating costs divided by number of units used (e.g. cost per gallon)

How are water users charged?  Declining block pricing High marginal price for first units (block) of water units used High marginal price for first units (block) of water units used Subsequent units (blocks) are less expensive Subsequent units (blocks) are less expensive  Increasing block pricing Subsequent “blocks” of water consumed beyond an initial quantity are priced at increasingly higher levels Subsequent “blocks” of water consumed beyond an initial quantity are priced at increasingly higher levels

What is efficient pricing?  Marginal cost pricing Consumers pay a price equal to the marginal cost of supplying the water Consumers pay a price equal to the marginal cost of supplying the water $ water MB MC P Q Profit

 Open access Ground water in Texas Ground water in Texas  Exclusivity and Enforceability “Reasonable use” doctrine in Michigan “Reasonable use” doctrine in Michigan Large quantity withdrawals must register and must not have adverse resource impact Large quantity withdrawals must register and must not have adverse resource impact  Transferability: Ability to transfer use rights to highest value use  Privatization Water: public or private good?