This paper analyzes some economic issues involved with the common practice of using metered water rate revenue to fund debt retirement associated with the provision of municipal water and wastewater services. We conclude that rather than simply raising the metered rate, city officials should seriously consider increasing the tax rate levied under the local property tax. There is an important trade-off in the choice of a price policy. An increased property tax rate can result in tax savings to some home owners, which lowers their net expenditure for water. However, a corresponding decrease in the metered rate may increase water consumption, which in turn raises operating cost. In order to do what is best for home owners, it might make sense to give other customers (e.g., a university) an easy ride, even if the latter, because of its low (inelastic) price elasticity of demand for water, is viewed by the municipality as a cash cow.
Water Resources Research
Merz, T. E.
The pricing of water in a university town: An economic analysis of draining a cash cow.
Water Resources Research,
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