Estimating benefits of water prices reforms in France.

Summary The objective of this paper is to analyze the pricing of water services delegated to private operators in France, using an econometric model describing both the supply and demand of drinking water. The production structure of municipal water utilities is represented by a Translog cost function, and the water demand function is specified taking into account domestic and industrial users. The Generalized Method of Moments (GMM) is used with panel data, on a sample of water utilities in the Bordeaux region, to jointly estimate the supply and demand functions. On the basis of the estimated technology and demand parameters, we simulate the prices according to the marginal cost rule (first-best pricing) and the variation of social surplus. It is shown that the optimal pricing scheme is first characterized by higher marginal prices and then by lower fixed charges. However, the shift to more efficient pricing does not have significant social welfare consequences.