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Show core. Since small volume users pay a higher average price than do large volume users, it might be argued that the affluent area is being subsidized by the poorer core area. On the other hand, if the large volume users are responsible for scale economies, charging them a higher price would essentially be socializing the costs, which is not economically efficient. Furthermore, if there were no large volume users, the system would be operating at higher overall costs and rates to core city residents might be higher rather than lower as a result. Consciousness of the charge is high with any metering and block pricing system because as use increases, the user finds that the associated charge also increases. Constant Block Rate The constant block rate is the most efficient method of allocation for a utility paying equal unit cost for each increment of water supplied. The determination of the price is simple, and there is no discriminatory pricing. One need only divide total costs by the total quantity used to arrive at the average total cost. Because marginal and average costs are equal in a constant cost industry, average cost pricing is the same as marginal cost pricing. Under a constant block pricing policy, the water is metered and the marginal cost to consumers is equal throughout the entire range of quantities taken. The incremental cost for additional units consumed though constant, creates incentive to conserve. The constant block rate may generate revenues above the actual costs of supplying a given quantity of water, However, when revenues are set above costs, there is a distortion of the market system and resources are under utilized. Under constant costs the constant block pricing policy will satisfy all of the consensus criteria of equity and economic efficiency. It is impersonal, and a user knows exactly what his bill will be with increased use. He also can be certain that the same relevant circumstances will apply in consecutive periods. The constant block pricing policy is generally more progressive than any of the previously discussed user fee structures and more egalitarian in its distribution of benefits and burdens. Each user is charged according to amount of use and each pays the same average price for units consumed. Water use and income increases have been found to be positively correlated, but the fee is not progressive unless water use increases faster than income. If water use and income increase proportionately the charge is neither progressive nor regressive. Since this pricing policy does not vary the charge with income, size and composition of family, age and occupation of family members, and use of income, it can satisfy these criteria only by accident. When individuals of similar income characteristics have similar use patterns, their water charge will be similar. However, data are not available for an across the board determination of how user fees and family composition and income are related. The constant block rate stimulates widespread tax consciousness and provides incentives to conserve found in the marketplace. Each consecutive unit consumed has a positive marginal cost and the marginal costs are equal throughout the range of consumption. With this pricing policy, each individual can consume to the point where his marginal benefit and marginal cost are equal thus maximizing returns. Increasing Block Rates Increasing block rates follow a marginal cost curve increasing with volume of water supplied. Such a curve is typical of rapidly growing city facing the increased costs of seeking more distant water sources after exhausting nearer and less expensive ones. Such a city is often also faced with construction of expensive new water treatment facilities and with expanding its distribution system into low density suburban areas requiring more pipe per customer served. Figure 8 shows an increasing cost function. The accompanying efficient price is located where the marginal cost curve intersects the demand curve at point A. If the price is set at this point, total revenues are represented by the rectangle PeAQeO and exceed costs by the rectangle PeAHPc. Thus, the water supply utility is making a pure economic profit. Although point A locates the efficient price and quantity, utilities ordinarily are required to operate on a rate of return basis and are not allowed to make a pure economic profit. In this case, the fee structure that preserves marginal price PQ is obtained by setting price at Pj for the quantity Q[ and then increasing the price in increments ( blocks) to the efficient price Pe. With an increasing block rate, low volume consumers are able to gain from past economies of scale, but large volume consumers, whose use is causing system expansion, pay higher prices. An increasing block rate pricing policy can meet all of the efficiency criteria and provide marginal cost pricing for a utility that actually has an increasing cost function. It is also an effective conservation tool. The increasing marginal cost to the consumer generates strong incentives to conserve. Administrative cost is the same for an increasing block rate as for decreasing block rates and slightly higher than for the less complex constant. Metering and billing are the only added functions which the flat rates do not have. Revenue potential increases with increased demands and can be used to generate a pure economic profit by simply applying the marginal cost pricing rule. As is the case with the previous user fee 21 |