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Pricing Efficiency Analysis of Residential Water in Banyumas, Central Java, Indonesia
Dissertation Abstract:
The study was conducted at the Banyumas Regency of Central Java Province, Indonesia, where the water supply and demand imbalances in several basins are becoming critical. The main objective of this study was to analyze the pricing policy of residential water based on the social benefit point of view. The major concern was the estimation of the marginal opportunity cost of providing residential water. The method used was the full cost pricing or marginal opportunity cost pricing approach, which involves estimating the marginal external cost (EC) and the marginal user cost (MUC) on top of the marginal production cost (MPC).
The two-stage least squares method was used to estimate the demand function using survey data from 400 households. Marginal cost function was developed using time series data from 1975 to 1997. Demand for residential water was significantly affected by income, number of residents, number of bathrooms, income-effect (ESTDi), and household technology (household appliances) that use water.
Empirical results showed that water was delivered to only 40 percent of households in the service area or 19 percent of the total households in Banyumas Regency. The existing water price was lower than the marginal cost. This encouraged a huge demand for water, especially in the last three years from 1995 to June 1998 when the household connections almost doubled.
The price of residential water was IDR529.62 per cubic meter. The full cost pricing estimation revealed a marginal opportunity cost (MOC) of IDR1,393.45. The MOC was made up of MPC (IDR423.12), MEC (IDR41.18), and MUC (IDR929.15). As indicated, there was an under-pricing of residential water by 67 percent in the current pricing structure. The imposition of the full cost price will result in the reduction of water consumption to the optimal level of 2,082,283m3, which is 27 percent lower than the current level of 7,711,291m3.