Efficient Water Pricing Policies as an Appropriate Municipal Revenue Source

Marginal-cost pricing of municipal water in water-scarce regions is both an efficient way to achieve conservation goals and an efficient revenue source for municipalities. Nevertheless, marginal-cost water pricing is quite unusual and often prohibited, probably because water revenues are perceived to have an unfairly regressive incidence. To examine the validity of this perception, Census data from San Antonio, Texas, is used to estimate the income elasticity of demand for water there. This result and similar estimates elsewhere suggest that the regressivity of water revenues compares favorably with published regressivity estimates for traditional municipal revenue sources. Moreover, a form of two-part water pricing is shown capable of increasing progressivity without inefficiency. Revenue under this pricing regime is flexible, which allows authorities to meet a range of preset revenue targets, trading off neither efficiency nor fairness.