econ495 presentation
DESCRIPTION
Presentation of my senior thesis on the price of waterTRANSCRIPT
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The Price of Water
Ashley Ice
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Introduction
• The average American uses 183 gallons of water per day, less than 5% is used on drinking and cooking.– Toilet: 27.4 gallons– Laundry: 17.2– Shower: 14.1– Faucets:10.2– Bath: 7.8
• The average American household spends $523 per year on water/wastewater charges and $707 on carbonated soft drinks and other beverages
• You can refill an 8oz glass of water 2,500 times from the tap for less than the cost of a single Coke
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Introduction cntd.
• Water levels in the Ogallala aquifer, which underlies 8 mid-west states, have fallen by 30% since the 1940s
• The Colorado River barely makes it to the Gulf of California.
• As water levels have steadily decreased over the past 50 years the real price of water has also decreased.
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Price vs. Non-Price Conservation
• In a recent study of 12 U.S. and Canadian cities replacing 2 day/week watering restrictions with an increase is price could achieve the same level of water savings with welfare gains of $81/household
• Political reasons for non-price conservation!– Eliminating subsidies and increasing price is
unpopular
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Full Cost Pricing
• While it is important to ensure that all citizens have access to clean water this does not imply that water should be free of charge
• Prices signal value to customers and it is important for the price to reflect the inherent and increasing scarcity of water.
• The full cost of water should account for:1) The utilities operation and maintenance costs2) The cost to develop additional capacity3) The social and environmental opportunity costs
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Flat Rate Pricing
• Customers pay the same fee regardless of how much they consume
• When demand is high the revenue may not be enough to cover additional treatment costs
• Low overhead costs
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Increasing Block Rate Pricing
• Customers pay marginally more as they consume more water
• Customers who consumer at or below the average level are rewarded
• Those who consume above average are forced to pay for the extra burden they place on the system
• May deter large businesses
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Decreasing Block Rate Pricing
• As consumption increases water becomes marginally less expensive
• Those that consume average levels pay higher per unit costs
• May result in insufficient revenue if demand is high
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Seasonal Pricing
• Charge higher rates in months of peak demand
• Seasonal rates account for the increased marginal extraction costs during dry months
• Brings in additional revenue in times when costs are higher
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Costs of Full Cost(Conservation) Pricing
• Promoting water conservation may run contrary to utility companies self-interest
• Decreased revenue/short-term revenue instability• Underutilized capacity in the water treatment system
would cause inefficiencies • Potentially high switchover costs• Conservation focused water pricing would be less
attractive to business• The majority of water companies rely on revenue
from water usage to cover fixed costs
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Benefits of Full Cost Pricing
• Due to decreased consumption to life of existing capacity could be extended
• Enhances long-term financial stability• Full cost pricing eliminates the need for subsidies
for utility companies, saving taxpayer money• Specific trade-off between an increase in price
and a decrease in consumption-utility companies could price water at a rate that eliminates revenue loss.
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Case: Tucson vs. Phoenix, AZ
• Both traditionally dry, drought prone areas that have experienced population growth in recent years
• Phoenix has a flat price structure and Tucson has an increasing block structure
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Case cntd.
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Conclusion
• The average residential water price elasticity in the United States is between -0.3 and -0.4 this indicates that water is price inelastic but not price un-responsive.
• As stated earlier, less than 5% of daily water usage is for cooking a drinking- This leaves room for utility companies to increase the price of water to full cost without taking away a basic necessity
• If consumption continues to increase extraction costs will also increase
• Important to take the future into account- evaluate the trade-off between short term revenue instability and long-term stability
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How you can help!
• Turn Off the Faucet While Brushing Your Teeth• Bring Your Water With You• Buy Recycled-Paper Products• Install a Low-Flow Showerhead• Water Your Lawn in the Early Morning or Evening• Water Your Lawn With a Hose, Not a Sprinkler• Eat One More Vegetarian Meal a Week• Use a Lower Setting on Your Dishwasher• Install Faucet Aerators
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Questions????