Policy Note: Short-term Pain for Long-term Gain: Urban Water Pricing and the Risk-adjusted User Cost

摘要

The paper introduces the concept of the risk-adjusted user cost (RAUC) and its application to the volumetric price charged to water consumers. It is a risk premium that would be incorporated into and be a component of a dynamic pricing framework. The benefit of the RAUC is that it allows decision-makers to inter-temporally maximize social welfare when the future water supply is uncertain. The RAUC imposes higher volumetric prices today to promote water conservation and, thus, mitigate the possibility of future water restrictions. An application of how the RAUC can be estimated is provided based on data from the Australian Capital Territory, Australia. Key policy implications in relation to the RAUC and dynamic water pricing are also presented.