Laddered water pricing model based on CES utility function

The increasing water demand directly results in the dwindling water supply in many cities of China. Water price plays an important role in the manage of urban water supply. The policy of laddered water price can reach the objective of water commodity pricing and establish the effective mechanisms with the core of water-saving, but it will face a practical problem due to for the lack of theoretical foundation support and appropriate empirical specification. In this paper, on the basis of CES utility function, the theoretical model of laddered water price is established. Taking Shanghai as the case study, the laddered water price model is used to estimate the water price for living in the year 2005. The results suggest that the water price is about 3.63 RMB per cubic metre as the average living-water consumption is 0 cubic metre per person to 45.68cubic metres per person every year, and the price is recommended as about 5.45 RMB per cubic metre as the average consumption is larger than 45.68 cubic metre per person to 69.25 cubic metres per person every year. When the per capita consumption is larger than 69.25 cubic metres every year, the water price should be set as 5.45 RMB per cubic metre.