Pricing of urban water supply using the smart market approach

These days, due to fiscal limitations, governments are rethinking full-cost recovery for urban water supply and are increasingly adopting the Increasing Block Tariff (IBT) structure. Typically, an IBT structure is determined from considerations of economic efficiency, social equity, and environmental sustainability and kept static while demand management objectives especially responding to water scarcity problem is addressed through water restrictions. This paper proposes a variable IBT structure that can meet the demand management objectives without imposing any water restrictions which could provide additional revenue in the form of Marshallian surplus. The slow response rate of consumers due to changes in tariff structure which is cited as the primary reason that necessitates the introduction of water restrictions can be remedied through the adoption of smart market approach. This approach is applied to Perth, Western Australia and the implications of the shift from existing pricing structure to the new pricing scheme are discussed.