MODELING OF A BLOCK TARIFF SYSTEM FOR GROUNDWATER REGULATION

Abstract

The block tariff system is widely used by public utility companies and governments. Because the unit rate is determined at the same time as are choice variables, the resulting endogeneity has been the subject of studies on residential water demand and in labor economics. Without discussing any mechanism that helps people come to their final decisions, these studies rely on observed data and econometric tools to estimate parameters in demand or supply functions. Because their main concern is the amount of resources devoted to a prespecified activity, their methodologies cannot analyze problems in which resources could flow to more than one outlet. This study constructs a computable framework that can deal with the endogeneity issue and help allocate scarce resources to mutually exclusive activities. Using a block tariff system for regulating groundwater extraction by aquaculture farmers in Taiwan as an example, we will show how the government and farmers can rely on the proposed framework to meet their interests.