Pricing, Demand Analysis and Simulation: An Application to a Water Utility

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Universal-Publishers, 1999 - Business & Economics - 216 pages
Recent changes in the New South Wales water utilities show a trend towards usage-related pricing, with the aim of providing efficient signals for consumption. This thesis evaluates alternative pricing strategies for water against the criteria of efficiency and equity while maintaining the financial viability of the public utility. First, the water utility cost structure is examined by developing cost functions to estimate short and long-run marginal costs, using a quarterly time-series data from 1970/71 to 1995/96. Second, a residential water demand model is developed using a panel data set (constructed for the analysis), comprising 822 cross-sectional units and 23 quarterly time periods from 1990/91 to 1995/96. The purposes of developing the demand model are to test the sensitivity of water demand to changes in the tariff structure and to use it to simulate the impact of alternative pricing strategies. Third, the simulation model is developed to analyse various pricing reforms using both the cost and demand model results, where the individual welfare and aggregate efficiency gains are determined under each pricing policy. In addition to this, the distributional effects of various tariff structures are examined. The empirical results of the cost structure estimates are comparable with previous studies. The demand estimation indicates that consumers respond to price, therefore price can be considered as a tool in the implementation of demand management strategies. However, the magnitude of the price elasticity suggests that substantial increases in price would be required to influence demand. Finally, the simulation results show that in the case of movement from the actual tariff structure to a two-part tariff policy (where the usage charge is equal to the short-run marginal cost), leads to highest efficiency gains.
 

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Contents

55 Summary
105
Marginal Cost Analysis
107
61 Estimation of Short and LongRun Marginal Costs
108
612 Data Used in Cost Estimation
111
613 Estimation Technique and Results
118
62 Calculated Approximations to LongRun Marginal Cost
123
621 Present Worth Incremental System Cost PWISC
124
622 Average Incremental Cost AIC
126

THEORETICAL FRAMEWORK
28
Pricing Theory
29
32 SecondBest Analysis
42
321 Uniform Pricing
44
322 NonUniform Pricing
47
33 Other Prices
60
34 Summary
63
Welfare Measurement
65
41 Developments in Welfare Measure
66
42 The Welfare Measures
69
43 Duality Approach
71
44 Expenditure and Indirect Utility Functions and Welfare Measures
74
45 Measurement Error
77
46 Summary
78
EMPIRICAL ANALYSIS
79
Empirical Pricing Studies
80
51 First Best
81
521 Ramsey Price Case Studies in Electricity
82
522 Ramsey Price Case Studies in Transport Communications Gas and Water
88
53 Nonuniform Pricing
91
531 TwoPart Tariff Case Studies in Electricity Communications and Water
92
532 Multipart Tariff Case Studies in Electricity Communications and Water
96
54 Other Prices
102
542 Average Incremental Cost AIC Case Study in Water
104
623 Data Used in Calculating Approximate LongRun Marginal Costs
127
63 Summary
129
Demand Analysis
130
72 Past Approaches to Modelling
131
73 Methodology An Econometric Water Demand Model
135
74 Data
138
75 Estimation Technique and Results
142
76 Summary
151
Appendix to Chapter Seven
153
Price Reforms and Simulation Analysis
156
82 Pricing Policies
158
822 Uniform Pricing
159
The Simulation Model
160
84 Data
163
85 Simulation Model Results
164
852 Welfare Gains and Losses
167
853 Efficiency Gains and Losses
183
86 Summary
184
CONCLUSION
186
Conclusion
187
91 The Achievements of the thesis
188
92 Further Research
190
References
191
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Page 7 - OECD comparisons of productivity levels in the public utility sector indicate that labour productivity in Australia is less than half the OECD average and capital productivity is a little more than half.
Page 8 - Microeconomic reform in its broadest sense is about making markets work better, improving incentives and enhancing the effectiveness of government operations.

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