Water Pricing Forecast Model and Generalized Method of Moments Estimation

Abstract:

The study aims to evaluate the pricing of water utilities by generalized method of moments(GMM) estimation.An econometric model is elaborated in terms of both water supply and demand and applied to study utilities located east in China.Based on the GMM estimated technology and demand parameters,marginalcost pricing and social surplus variations are simulated.The estimated parameters are derived and estimates of returns to scale and elasticities of water demand are discussed.The current pricing of water utilities is analyzed 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.It shows that the optimal pricing scheme is characterized first by higher marginal prices and second by a lower fixed charge.