Estimating the benefits of efficient water pricing in France

The purpose of this paper is to evaluate the pricing of French water utilities. An econometric model describing both water supply and demand is specified and estimated on utilities located in the Bordeaux area. Based on the estimated technology and demand parameters, we simulate marginal-cost pricing (first-best pricing) and social surplus variations. We find a significant difference between observed marginal prices and marginal costs. We show that the optimal pricing scheme is characterized, first by higher marginal prices and second by a lower fixed charge. However, moving towards efficient prices does not result in important direct welfare effects.