Economics Expert Proposes Tiered Pricing Drought Solution

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Frank Wolak, an Economics Professor at Stanford University proposed that the current situation of drought in California can be controlled by the strategy of Tiered pricing of water. This means that water would be provided by charging higher prices so that its usage can be reduced and water can be saved. Wolak’s main concern is to create competition in the infrastructure industry. He introduced a new pricing model according to which the demand of water by the customers is designed in a way which would help to make the water rates for the achievement of goals regarding the revenue. This strategy of Tiered pricing is also known as Increased Block Priced Schedules.

According to this strategy the lowest level of price block or tier means that basic need of the water should be fulfilled which is drinking and bathing. When the consumption is increased apart from these needs like people use water to fill their swimming pools and plants are watered, the tier price would increase as per unit so that people become reluctant to use more water for these things which are not much significant.

Wolak’s work has significance as through his work a tool is obtained by the water utilities which help them in the prediction of the quantity what customer demands and the bill which they should expect to pay for the water use. The tool which is a product of his work can help in such a way a schedule of price can be prepared by which the expected monthly bill which customers have to pay becomes equal to the cost which is incurred to provide the water by the utility. Through this, the requirements of the Proposition can be met by the prices. Proposition 218 is the financing measure which makes the new requirements for the water standby charges in California and utilities have to meet the requirements of this proposition.

Wolak has given some ways in which the model can be used and benefits can be taken by saving the water. He advised the utilities to conduct a research through online surveys which could help them to make better estimates of the requirement of the water by the users as the data which will be collected through this survey would be put into his model and better correlation can be made among the monthly rates which are charged by the utilities and their incurred costs. This would give them a better result.

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He also suggested that dynamic pricing strategy can be used to save water. Hourly charges can be made by which users will reduce the use of water in particulars hours during which charges are more. Governor of California has passed a new rule for the utilities that they should cut the use of water between 8% and 36% till February next year. 25% of water usage is target to be cut in the urban areas.

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