Pricing Water From a Utility Perspective
Water is usually a scarce commodity but not in all situations, such as in Virginia, which is characterized by plentiful ground water supply. However, the relevant agencies in this state incur costs relating to drilling and pumping water from the ground, procurement and infrastructure costs. Because of this, pricing of water has become an important factor in water management. For utility companies in Virginia and other states, selling the water at the appropriate price is increasingly important since low costs do not cover operational costs, whereas high costs contribute to inadequate sales. The determination of the most suitable pricing model or scheme requires critical evaluation from a utility perspective and whether this commodity is affected by the same principles of economics as other goods and services or utilities.
Price Sensitivity of Water
From a utility perspective, water has seemingly weak price sensitivity as compared to other commodities because it has traditionally been managed by non-price demand management techniques. The current trend for water utilities has been classified as one of decreased sales and ever-increasing costs.
The relatively weak price sensitivity of water is attributable to the widely used non-price-based policies like education campaigns, technological initiatives, or rationing. According to the findings of several studies on water conservation, price responsiveness or sensitivity to water is low with regards to residential water use on an annual basis (Gaudin, 2004). The other reason for the weak price sensitivity of water unlike other commodities or utilities is the intrinsic nature of water as a necessity. As a result, consumers are increasingly unwilling to respond to price changes for the use of this utility.
Economic Principles in Water and Sewer Pricing
In light of the relatively weak price sensitivity and responsiveness of water, pricing water and sewer does not respond to similar principles of economics like other goods and services. In most cases, the management of goods and services entails the use of price-based instruments, which results in high price elasticity. Water does not respond to similar principles of economics because its management and conservation largely entails the use of non-price instruments. Secondly, when demand increases in other goods and services, there is always a price increase to capitalize on the...
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