Income redistribution, water scarcity and water rates in the 225 largest US cities

Abstract

As in the electricity sector, water utilities commonly use increasing-block tariffs despite economists’ theoretical advice to set the volumetric price at the long-run marginal cost of supply. The most common justifications are to shift costs away from lower-income users (who are presumed to use less water) and to provide conservation incentives in the face of scarcity. Following a recent paper in the electricity sector, we calculate water and sewer rate redistributiveness for 225 US cities and explore whether this measure is related to local waterscarcity and income inequality. We combine data on rates, customer assistance programs, county-level Census demographics, utility characteristics, and presidential vote shares with a nation-wide dataset on water consumption. We also introduce a long-term measure ofwater scarcity (Padowski and Jawitz, 2012) to the debate on whether customers in water scarce regions really do face higher prices. As in the electricity sector, we find that water rates are more redistributive in areas with higher local income inequality, though this resultis sensitive to how we define our redistribution measure. We also find no evidence that customer assistance programs are a substitute for increasing-block tariffs. We find little evidence that rates are more redistributive in areas with higher water scarcity. We discuss whether, as in electricity, redistributive water tariffs may be ineffective at providing much assistance to lower-income customers.