Water Tariff Setting and Its Welfare Implications: Evidence from Cities in the People’s Republic of China
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This study develops a framework to analyze urban water tariff setting and its welfare implications and applies this to panel data on more than 200 cities in the People’s Republic of China in the 2000s.
First, the authors show that peer cities’ average water tariffs have a significant influence on a city’s tariff levels. The former is then used as an instrumental variable to correct the endogeneity bias in estimating water demand functions. Estimation of a translog multiproduct joint cost function reveals strong scale and scope economies in urban water supply. Comparing the equilibrium and actual tariffs, the study estimates a moderate welfare loss under first-best pricing in the context of the People’s Republic of China.