The Theory of Water and Utility Pricing - Global Drinking Water Management and Conservation - page 74

the revenue from either or sales and consumption taxes. Some of this

impetus has come from economists who emphasize that taxing income is

“ user fees, ”

“ distor-

tionary ” and also not “ incentive-compatible ” and that not taxing income would

encourage on the assumption that all savings will be invested, for the

betterment of humanity.
But this principle of marginal cost pricing has increasingly become of theoretical
interest only. With declining tax revenues and also budget de

“ saving, ”

cits, the principle is
being abandoned in most jurisdictions with a few exceptions. Almost all local
jurisdictions are told to raise their own capital or charge for it through user fees, i.e.
they are told that they are

For example, in Ontario (see Dore 2015 ),
all municipalities are legally required to plan for the full cost of their water
including the capital costs and also for the future renewal of water infrastructure. In
Europe and elsewhere there is even pressure to

“ on their own. ”

water utilities, as many
of the state-controlled (in the case of water, mostly municipal) utilities do not have
the

“ privatize ”

finance to renew their infrastructure and have even neglected infrastructure
maintenance, called Much of North America has this

problem of old and failing water infrastructure. The political climate of low taxes
and privatization is a pervasive phenomenon, covering most developed countries,
i.e. countries in the European Union, the US as well as Canada.
Is there a case for the privatization of the drinking water sector? The next section
considers the theoretical case for privatizing what has been previously public sector
production. The main case against public provision is the possible inef

“ deferred maintenance. ”

ciency of the

public sector, which does not have pro tability as a guide to all decision making.

5.3 Private Versus Public Production

The choice between private or public production should be based within the general
framework of what is now called the (Boadway 1997 )

when Professor Jim Mirlees opened up a new avenue of research with the theory of
optimal taxation (Mirrlees 1971 ). The advocates of optimal taxation draw their
inspiration from two papers by Ramsey ( 1927 , 1928 ). In his 1928 paper, Ramsey
was trying to work out how much a

“ new public economics ”

“ socialist society ” would need to save, a society

that would have a ned single social welfare

criterion that it wished to maximize. But what might have been appropriate for a
single-minded socialist planning authority has now been transformed into an
inquiry in which a heterogeneous society is analyzed by treating it as a single
consumer. That is, in this approach, social questions are answered by positing a
single

“ planning authority, ” with a well de

“ ”

This is a microeconomic approach, using a repre-
sentative consumer, or assuming that all consumers are alike; in Ramsey, this was
an interesting thought experiment. This chapter has given rise to the theory of
“

representative agent.

However, a year earlier (Ramsey 1927 ) published an
article on commodity taxation and pricing, when a utility cannot implement the
Hotelling marginal cost pricing rule but must raise prices above marginal cost in

optimal economic growth. ”