Abstract
We exploit a unique data set to estimate the degree of economies of scale in water consumption, controlling for the standard demand factors. We found a linear Engel curve in water consumption: each additional household member consumes the same amount regardless of household size, except for a single person household. Our evidence suggests that the IBT (increasing block tariffs) structure, which is indifferent to household size, has unintended consequences. Large households, which are also likely to be poor given the negative correlation between income and household size, are forced to pay higher price for water. The degree of economies of scale found here erodes the logic of using an IBT price structure as a way to introduce an equity consideration. This implication is important in view of the global trend toward the use of IBT.
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