Revenue neutral water conservation: Marginal cost pricing with discount coupons

Abstract

This paper points out how a system of marketable discount coupons applied to the sale of water by an agency can satisfy both redistributional and revenue constraints without compromise to economic efficiency, in effect creating marketable multipart pricing. This procedure achieves marginal cost pricing for each user while decreasing the average consumer's expenditures on water. Efficiency would obtain both in allocation among users and in overall usage. No information on consumer demand for water is required. A useful by‐product is market revelation of the marginal value of incremental water usage, thereby also shedding light on the value of incremental water projects.