Question

Scenario: More than half of all residential water connections in Britain are not metered. Residential customers pay a flat fee regardless of usage. Scottish Water, which supplies water in Scotland, says there is no evidence that the installation of meters encourages lower than normal usage of water. The Salmond family lives in a home that is not metered. The family consumes around 10,000 gallons a month.

Suppose that (with metering) the Salmonds’ neighbor spends more than the Salmond family on water each month. Does this imply that the neighbors get more benefit from water?

Answer 1

It cannot be said with precision. It depends on the demand function of both families. Benefit in terms of consumer surplus will be higher for the neighbors when their willingness to pay is higher than the Salmonds. Also, it is given that the neighbors spend more on water each month implying that their net benefit (difference between marginal benefit and marginal cost) might be lower if the demand curve faced by the two families is same. Hence it is not necessary that spending a greater amount results in greater benefits.