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Show The flat rate cannot distribute benefits and burdens equally among households of like income, size and composition of family, including age and occupation of members, or use of income. The objective of distributing benefits and burdens to favor depressed geographic regions cannot be achieved. For most municipal water works, the depressed regions would be core city areas in which low income families are frequently located. The flat rate penalizes these users and subsidizes the more affluent areas. The suburban dweller uses considerably more water than does an inner city dweller. Sprinkling is the primary use associated with consumption of large quantities of water, and because suburban dwellers have larger lawns and gardens, they are responsible for the peak demands and hence system expansion. It is desirable that a fee not unduly burden ethnic, color, or status groups directly or indirectly. Since certain groups such as blacks are predominant in core city areas, which have low rates of use, the flat rate indirectly discriminates against such groups. In summary, the flat rate gets a very good score on the criterion of administrative simplicity and is quite acceptable with respect to the fairness aspects of equity. It cannot promote allocational effectiveness unless the dominant goal is to minimize charges to promote greater water use. The flat rate does not further economic efficiency except in the exceptional situation where the marginal cost of service is approximately equal for all users. The more undesirable effect of the flat rate, however, is its tendency to concentrate the financial burden on the poor and on minority groups. Modified Flat Rate The modified flat rate schedule varies from the flat rate charge by varying the rate according to the type of customer. This modification works to allocate payment among user groups more efficiently but within a group produces no incentives to conserve water. Even though large users are charged more, their individual charge is not based on consumption and as individual users they have no economic incentive to hold their use to the point where marginal value received equals marginal cost. The modified flat rate has greater revenue potential ( groups with a high ability to pay can be charged more) than a flat rate, but it is not significantly more complex to administer. A modified flat rate scores well on all consensus criteria except relevance ( charge not related to use). Impersonality is preserved because of the equal treatment of equals. Customer classes are assessed and billed the same for consecutive periods. Certainty and continuity are insured because of the predictability of the fee in consecutive periods. There is no mispayment and the cost of compliance is negligible. The conflict criteria are better satisfied by the modified flat rate than the flat rate. Separating users into customer classes reduces the regressivity of the burden. The charge also narrows the distortion of benefit distribution. Under a modified flat rate, larger users may be charged more and in this way pay more toward the benefits they receive from water use. The extra burden on the poor may be reduced by a modified flat rate if users on the periphery of the city with large yards are assessed more than apartment dwellers of the inner city. The degree of progressivity and regressivity can only be determined by examining how customer classes are separated and how much each is charged. Because the modification to the flat rate is not based on type of income, size and composition of family, or use of income, it cannot distribute the benefits and burdens in accordance with these principles. It can, however, take account of uses which may be similar because of income and water use correlation. Widespread consciousness of the charge is not characteristic of the modified flat rate. Because marginal cost is zero, there are no incentives to conserve and because the measure of consciousness is based on marginal use it can be said that there is little consciousness of the charge. If the system capacity is adequate, this may not be of great importance to either users or political leaders who assess the charge, but if the capacity is limited, it will soon become an issue of concern. Decreasing Block Rates Decreasing block rates are based on the premise that costs of providing the service decrease with increased volume of use. This is the case for utilities that gain economies of scale from increased production, high density population, and small service areas. If water cost for a municipality follows this type of decreasing cost function, the decreasing block rate is the most economically efficient user fee structure. One problem associated with the decreasing cost function is that if marginal price is set at marginal cost the utility will have insufficient revenues. In this situation, the utility will either have to be subsidized or it will instead have to practice average cost pricing or some type of price discrimination. A major advantage of a declining block rate is that it permits a utility both to cover costs and practice marginal cost pricing. In Figure 6, the market demand is represented by line D, average cost is represented by AC, and marginal cost is represented by MC. The efficient price and quantity are P3 and Q3, respectively, located at the point where the marginal cost curve intersects the market demand curve. If price is set at this point, however, the utility faces a loss equal to the rectangle PaGCP3. A declining block rate is a form of discriminatory pricing that can generate sufficient revenue to cover this loss. If price Pj is charged for the initial block quantity OQj the revenue generated will be equal to the rectangle P^ AQ^ C). If the next block quantity sells for price P2, the revenue is represented by the 19 |