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Conservation Using a Rate of Return Decision Rule: Some Examples from California Municipal Water Departments
Author(s) -
Mercer Lloyd J.,
Morgan W. Douglas
Publication year - 1985
Publication title -
water resources research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.863
H-Index - 217
eISSN - 1944-7973
pISSN - 0043-1397
DOI - 10.1029/wr021i007p00927
Subject(s) - rate of return , internal rate of return , time weighted return , rationing , economics , return of capital , holding period return , return on capital , investment performance , profit (economics) , return on investment , econometrics , microeconomics , finance , capital formation , health care , production (economics) , financial capital , economic growth
A significant alternative to physical rationing of water to achieve conservation is provided by the price system. To act like profit maximizing firms, municipal water utilities (MWD's) should price their water so as to earn the opportunity cost of capital (the market rate of return) on the assets. The actual internal rate of return is calculated for a sample of 30 California MWD's for a 12‐year period. For the 26 MWD's with a rate of return less than 10%, iterative simulations are run with increases in the MWD's average price to achieve the target rate of return. The magnitude of water conservation using the rate of return rule is reported for three alternative price elasticities of demand. The new implicit prices necessary to achieve the target rate of return are shown to be less than the cost of the cheapest new surface supply.