Working Paper: CEPR ID: DP8423
Authors: Reto Foellmi; Urs Meister
Abstract: In most developed countries, the provision of water is organized at a local level. The costs and tariffs vary significantly, even between adjacent water utilities. Such heterogeneity is an obvious indication of the sector?s overall inefficiency and stresses a need for institutional adjustments. We show that cooperation by water trade and the introduction of competition by common carriage between adjacent utilities are valuable alternatives to improve the industry?s efficiency, even when mergers are not feasible. Because both approaches require the physical connection of neighboring networks, they may have similar effects. This paper analyzes and compares the relevant welfare gains and shows that production efficiency and retail prices may differ depending on the initial cost differential, the application of regulations and the distribution of bargaining power. Using a theoretical model, we show that at higher initial production cost differentials, welfare is higher under competitive conditions, even in a lower-bound benchmark case without any regulation.
Keywords: bargaining; networks; product-market competition; trade; water
JEL Codes: D21; L43; L95; Q25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| cooperation by water trade and the introduction of competition (L59) | enhance the efficiency of water supply systems (Q25) |
| competition (L13) | improved welfare outcomes (I38) |
| competition (L13) | lower retail prices (L42) |
| competition (L13) | increased production efficiency (E23) |
| higher initial production cost differentials (F12) | welfare maximized under competitive conditions (D69) |
| competition by common carriage (L92) | stronger production incentives for less efficient suppliers (D22) |
| trade (F19) | welfare gains (D69) |
| initial efficiency differentials (D29) | extent of welfare gains from trade (F10) |