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Show and the viewpoint of a given group may change with time. ECONOMIC EFFICIENCY In competitive markets, prices respond to automatic, impersonal market mechanisms that balance the quantity of goods supplied with the quantity of goods demanded. The resulting allocation of resources is considered to be economically efficient. When government provides goods or services, there is generally no competing source of supply, and thus no forces of competition to establish fair prices and efficient resource allocation. A government policy to set fair prices becomes necessary. As political forces begin to set pricing policy, individuals in their political bargaining find it advantageous to conceal their true preferences thus giving a distorted view of market demand. For example, individuals may seek to enjoy benefits while passing the costs on to society. Government agencies may tend to conceal true price ( based on cost) in the interest of expanding programs and influence. ALLOCATIONAL EFFECTIVENESS Over the years, the public policy has been to look to many criteria besides economic efficiency in the allocation of water among uses. In the past, the economic development of arid regions on a national scale and a desire of communities to promote attractive landscaping on a local scale have been important objectives. Communities have considered it desirable to require suppliers to provide water to whomever wants it, whenever he wants it, and in whatever amount he wants. Many others have stressed the importance of wise long- term water use. Twenty years ago this meant fuller development for the benefit of future generations, but today the stress is on conservation of the natural environment. No matter which social goals are emphasized, the point is that the chosen goals affect optimal water allocation, and prices charged affect the allocation achieved. Allocational effectiveness, with respect to current social goals, becomes an important consideration in setting user fees. ADMINISTRATIVE SIMPLICITY The more uniform or simple fee structures are very easy to administer while efforts to vary fees to promote economic efficiency and allocational effectiveness require more complex fee schedules and become more difficult and costly to administer. The capability of water utilities and related governmental agencies to administer more complex schedules is often a factor constraining the ability to achieve efficiency goals. REVENUE GENERATING POTENTIAL The amount of revenue generated to pay for operations, maintenance, debt service, etc. is obviously an important criterion for assessing the merits of a fee structure. The potential of a fee to generate revenue is limited by two effects upon demand of higher fees. The first is a reduction in consumption ( except when demand is perfectly price inelastic). The second is substitution of alternative products. A formula for revenue maximization within these limits ( Hoggan and Asplund, 1974) is discussed in Chapter V. RATE STRUCTURE EVALUATION In this section, some of the more commonly used rate structures are evaluated against the above five criteria. The rate structures evaluated are uniform flat rate, decreasing block rate, constant block rate, increasing block rate, and demand metering and summer differential rates. James and Lee ( 1971) and Hirshleifer, Dehaven, and Milliman ( 1960) also discuss these utility rates. Uniform Flat Rate The uniform flat rate covers the cost of a water system by charging each user an amount equal to the total revenue required divided by the number of connections ( rights to use the system). Every user pays the same fee regardless of the quantity of water used. There is no financial incentive to conserve since the user's marginal cost of consumption is zero. Users are less likely to repair leaks, conserve on sprinkling uses, reduce peak consumption, etc. The results are waste and over- expansion of system capacity. The flat rate does not allocate resources efficiently and has economic justification only where the costs of installing meters exceed the costs of meeting the extra demand due to nonmetering or where everyone uses nearly the same amount of water. The most positive characteristic of the flat rate is administrative ease. The flat rate is the easiest charge to administer and is used frequently in small communities in which systems of metering are not available or there is insufficient staff to manage complex billing systems. Because users are assessed monthly, it is a continuous charge system and a user can know in advance what his payment will be and that he will be treated the same in consecutive periods. All customers are charged the same and can be excluded from service in the case of mispayment. This insures that the charge will be uniform and impersonal. Cost of compliance is equal for all who make the payment and because no substantial amount of time is involved, collection costs for the community are minimal. The conflict criteria are more difficult to apply. The progressivity and regressivity of benefits and burdens depends on the correlation between water charges paid and income. With a flat rate, everyone is charged the same, but everyone does not use an equal quantity of water. This favors large users at the expense of small users. If water use increases with income as has been indicated ( Gardner and Schick, 1964) the burden of the flat rate is regressive and the distribution of the benefits is progressive. The poor are subsidizing the rich. 18 |