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Open Access Publications from the University of California

Can Allocation-Based Rates Promote Water Conservation and Increase Welfare? A California Case Study.

  • Author(s): Baerenklau, K
  • Perez-Urdiales, M
  • et al.

An allocation-based rate (ABR) is a special type of increasing block rate (IBR) price structure that is receiving increased attention from urban water suppliers in places like California where population growth and climate change continue to increase water scarcity. Previous work by Baerenklau et al. (2014a, 2014b) investigates the conservation potential of ABR and finds that that consumption under ABR was 10-15% below that of a comparable uniform rate structure for a southern California case study. This paper extends that work by using the discrete-continuous choice framework to estimate household-level welfare effects of ABR for the same dataset. We find that despite the observed decrease in consumption, average household welfare actually increased under ABR due to its nonlinear structure. We also find that similar results would have been achievable with a simpler standard IBR structure. While either of these block rate structures is welfare-preferred to uniform price and quantity instruments, neither clearly dominates the other.

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