OptimalPrices for Urban Water

AGeneral Equilibrium Model Applied to Melbourne

ReportNo WSAA 43

June 1992

ABSTRACT

Thisreport describes a model of production, investment and pricing for an urbanwater authority. In standard applications, the authority is viewed as settingthe 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 ofa broader economy.

Adetailed application of the model is made to Melbourne. Optimal paths arederived 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 thewater authority are calculated.

Inits present form, the model does not recognize uncertainty in either streamflowor the demand for water products. Plans to extend the model to allow for theseaspects of reality are outlined in the concluding section.

Copiesof the Report are available from WSAA, price $A40. Orders may be placed throughthe Bookshop at www.wsaa.asn.au or by email to info@wsaa.asn.au.