Optimal Prices for Urban Water: A General Equilibrium Model Applied to Melbourne
This report was produced for the Urban Water Research Association of Australia, a now discontinued research program.
Report no. UWRAA 43
This report describes a model of production, investment and pricing for an urban water authority. In standard applications, the authority is viewed as setting the time paths of its variables to maximise community welfare over 100 years. The approach is general equilibrium, i.e. the authority is modelled as part of a broader economy.
A detailed application of the model is made to Melbourne. Optimal paths are derived for prices of inside and outside water in peak and non-peak periods. The costs to community welfare of various types of non-optimal behaviour by the water authority are calculated.
In its present form, the model does not recognize uncertainty in either streamflow or the demand for water products. Plans to extend the model to allow for these aspects of reality are outlined in the concluding section.