Determination of optimal price of domestic water consumption in Tehran city by using Ramsey model

Because of scarcity of water resources and increasing demand due to population growth, water resources management play a key role in keeping balance between supply and demand. Economic tools such as pricing can play an important role to keep balance between supply and demand. The aim of this study is to determine the optimal price of water for domestic uses in city of Tehran. For the purposes of this study, Demand functions are estimated using regression analysis for different consumption levels. Also, water cost function was derived by using Translog cost function. Suitable price is suggested based on the framework of Ramsey model for each consumption level. In this study, data of water consumption for period of 1975-2014 in the city of Tehran was used. The results shown that the price elasticity of water demand includes the range of -0.03 to -0.42 that is, in such a way that for higher consumption levels the price elasticity of demand increases. The production final cost for one cubic meter of water is 6719 Rials. The results indicated that the Ramsey optimal water price for using one cubic meter is 2209 Rials for the lowest level and it is 25373 Rials for highest level. Our result suggests that, in all water consumption levels Ramsey price is higher than the price paid by the consumers. Therefore it is suggested that the price for all levels of domestic water consumption to be increased in stepwise pattern to get close to the Ramsey Prices.