Water Tariff Setting and Its Welfare Implications: Evidence from Cities in the People’s Republic of China

First, the authors show that peer cities’ average water tariffs have a significant influence on a city’s tariff levels. The former is then used as an instrumental variable to correct the endogeneity bias in estimating water demand functions. Estimation of a translog multiproduct joint cost function reveals strong scale and scope economies in urban water supply. Comparing the equilibrium and actual tariffs, the study estimates a moderate welfare loss under first-best pricing in the context of the People’s Republic of China.