Water Price Forecasting Method Based on Marginal-cost Theory: a case study in China

摘要

The purpose of this paper is to evaluate the pricing of China water utilitiesaccording to past twenty year’s data. An econometric model describing both watersupply and demand is specified and estimated on utilities located in the east area ofChina. Based on the estimated technology and demand parameters, a new method offorecasting water price is presented. It used the marginal-cost theory that is close tothe historical data to establish the water price forecasting function, and according tothe process of marginal-cost function to build the forecasting model. We derive theestimated parameters and discuss estimates of returns to scale and elasticity of waterdemand, analyzing the current pricing of water utilities by comparing marginal costsand marginal prices. In a case study of Shanghai, these estimates are then used tosimulate first-best optimal pricing by solving a supply-demand system in prices andquantities. Finally, we find that the marginal cost price is the optimal pricing scheme,which is much better than fixed charge price and average cost price.