3 Water Supply, Demand and Tariffs

Question 1

The Market: Definition

Answer 1

Economic place of exchange
 Purchasers and sellers interact
 Determine price and range of products

Total relationships between supplying and demanding actors

Question 2

The Market: About purchaser

Answer 2

Purchaser and seller know
 where to buy and sell (location/place)
 the time when to demand or supply (time)
 what they want (type and quality)
 which price to pay or offer

Purchaser shows preferation a good compared to another; Sellers the same (opportunity cost)

Question 3

What are price and good?

Answer 3

Price: Compensation for the seller

Good: Compensation for the purchaser

Question 4

What is market equilibrium?

Answer 4

 At exactly one price and one traded quantity

 Intersection of the curves: Market-clearing price and corresponding quantity

 No incentive for price changes

Question 5

How the Price Mechanism works?

Answer 5

 Both sides accept a price, which results without regulation („quantity adjuster“)

 Equilibrium price: Price that equates the quantity offered with the quantity demanded

Note: Market is ”Coordination“; Balance of interests.

Question 6

Principle of economic efficiency guides economic theory behind

Answer 6

1. Water supply and related costs, and

2. Water demand

Question 7

Focus in economics: Optimal allocation of resources

Answer 7

• Optimization
   Companies wants to maximize profits
   Individuals wants to maximize utility
• Allocative efficiency: Allocation of limited resources

Question 8

Water supply: Who supplies (produces) water?

Answer 8

 Private or public institutions

 Profit or non-profit institutions

Question 9

Water supply: Who demands (uses) water?

Answer 9

 Agriculture (Irrigators/farmers)

 Private users (households)

 Companies / Facilities

Question 10

What costs do arise for the water supplying company?

Cost of suppliers of IRRIGATION WATER (an organization supplies retail water)

Answer 10

 Initial investment cost (machines, equipment, infrastructure, etc.)
 Pump and convey water to farm gates with infrastructure(pumping plants, canals,pipelines)
 Maintenance of infrastructure
 Administrative services (planning, management, accounting, billing and customer relations/care, etc.)

Question 11

What costs do arise for the water supplying company?

Cost of suppliers of URBANWATER (an organization supplies retail water)

Answer 11

 Initial investment + pump, convey, maintain
 Water treatment to ensure the quality of water
 Additional administrative services for treatment and quality
Accounting for a larger set of customers (households,industry)

Question 12

Water Demand

Answer 12

 Decision-making of a single water user agent (e.g. farmer, firm, household, publicly owned facility)

 Demand functions: Derived by assuming

1. Profit maximization of firms, companies, and farmers
2. Utility maximization of individuals and households

Question 13

Water Demand - Summary

Single firm

Lecture 3 slide 21

Answer 13

Efficiency in water demand requires firms to demand water up to qw*, where the marginal cost curve of producing with water crosses the demand curve

Question 14

Water Demand - Summary

Single consumer

Lecture 3 slide 21

Answer 14

Efficiency in water demand requires consumers to demand water up to qw*, where the price function of water crosses the demand curve

Question 15

Why water tariffs? Why water pricing?

Answer 15

Instrument to:

 protect against wasteful use (environmental protection)

 enhance economic productivity (of companies)

 manage/ influence demand (useless water)

 finance infrastructural improvement / maintainence

 obtain revenues (government, companies)

Question 16

Type of Water Tariffs:

Connection Fee

Answer 16

Payment of a fixed amount to be connected to the network

Pros: Covers companies installation & administration cost

Cons: Expensive to customers

Question 17

Type of Water Tariffs: 
Fixed Charge (Flat Fee)

Answer 17

Payment of an amount that always remains the same, regardless of the volume used

Pro: Known costs/profits

Con: Wasteful use

Question 18

Type of Water Tariffs:
Volumetric Change - Uniform Rate

Lecture 3 slide 28

Answer 18

check graph!

Pro: Predictable

Con: No incentive to use less or more

Note: incentive = a thing that motivates or encourages one to do something.

Question 19

Type of Water Tariffs:
Volumetric Change - Non-Uniform Rate

Lecture 3 slide 29

Answer 19

check graph!

Pro: Tries to avoid wasteful use

Con: Expensive for water intense users (agriculture)

Question 20

Type of Water Tariffs:
Volumetric Change - Block tariff (Increasing)

Lecture 3 slide 30

Answer 20

check graph!

Pro: Tries to avoid wasteful use (predictable blocks)

Con: Expensive for water intense users (agriculture)

Question 21

Type of Water Tariffs:
Volumetric Change - Block tariff (Decreasing)

Lecture 3 slide 31

Answer 21

check graph!

Pro: Preferable for water intense users

Con: Incentive to use more water

Question 22

Type of Water Tariffs:
Volumetric Rate + Fixed Charge

Lecture 3 slide 32

Answer 22

Graph MIX!

Pro: MIX!

Con: MIX!