Tariff rates based on Ramsey - Wilson model of changing welfare
criterion satisfying equity and efficiency have been estimated for three
categories of consumers of an urban water supply in India. The design
necessitates values of marginal cost and price elasticity. Paucity of data
severely restricts estimation of marginal cost compelling to use breakeven
as proxy. Price elasticity is obtained from household expenditure data
by applying recoverability theory suggested by Pollak and Wales. The
effect of household composition on elasticity has been eliminated by
expressing variables on a per capita basis using adult equivalent scale
(AES). Calculation of AES for water is based on Prais-Houthakker
incremental method. The scale indicates that it is totally different from
Amsterdam scale, the AES of food.
Maximum welfare is given to small quantity consumers by charging
a rate below breakeven combined with a subsidy arising from the surplus
generated in the markup of large quantity consumers. The middle group
is charged only the breakeven rate. The model can be generalised to any
number of groups by assigning different welfare weights ranging from
zero to one. The model breaks down if the rate exceeds stand-alone cost.
JEL Classification : H41, D4, Q25
Key words: tariff rates, second best prices, adult equivalent scale,
welfare weights, stand alone cos
