California Drought Remedies: The Importance of Tiered Pricing

Sep 1, 2015

California has sunny beaches and scenic landscapes, but its water supply is increasingly…well, short in supply. As the state enters its fourth year of severe drought, there is a rapidly growing urgency to conserve water. As rivers and lakes disappear and once green lawns are now left parched, the calls for water usage restrictions and penalties for excessive use are loud and frequent.

What are possible solutions to these water woes? Some propose to introduce tiered pricing, which is a kind of second degree price discrimination. This solution was implemented during a 2001 drought in Santa Fe, New Mexico, proving extremely effective and is already commonplace, albeit with cheaper prices, in nearly two-thirds of California water departments. Second degree price discrimination occurs when prices vary based on the quantity of product purchased. This is commonly seen with bulk discounts, where the per-unit price of a product decreases as greater quantities are purchased. For instance, a soda could be offered for $5 per 12 ounce bottle, and also for $15 per 60 ounce bottle. For three times the price, you would receive five times as much soda.

The way tiered pricing works for water in California is that individuals pay a low rate for an initial consumption level and a higher rate as they increase use beyond that level. Likewise, in Santa Fe, heavier water users paid more per unit compared to more efficient users. Today, the threshold tier in this region is $6.06 per 1,000 gallons of water used per month up to 7,000 gallons, which is meant to cover basic needs such as bathing and doing laundry. Beyond this level, water users pay $21.72 for each additional 1,000 gallons consumed.

This pricing structure discourages excessive water use by incentivizing just the opposite - water conservation.  In Santa Fe, after tiered pricing was implemented, the per capita water usage dropped to 100 gallons from 140 gallons, despite a population growth of 10% at the same time. In comparison, the per capita usage in Fresno, California, which currently does not have tiered pricing, is 222 gallons.

While Fresno recently implemented a modest rate increase, it will be interesting to see if the city follows other California cities in implementing tiered pricing to combat the state’s water woes. 

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