Forecasting Water Pricing model based on Marginal-cost

Abstract:

The purpose of this paper is to evaluate the pricing of water utilities by GMM (generalized method of moments) estimation. An econometric model describing both water supply and demand is specified and estimated on utilities located east in China. Based on the GMM estimated technology and demand parameters, simulate marginal-cost pricing and social surplus variations. We derive the estimated parameters and discuss estimates of returns to scale and elasticities of water demand, analyze the current pricing of water utilities by comparing marginal costs and marginal prices. These estimates are then used to simulate first-best optimal pricing by solving a supply-demand system in prices and quantities. We show that the optimal pricing scheme is characterized, first by higher marginal prices and second by a lower fixed charge.