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Accounting for Needs when Sharing Costs

Billette de Villemeur, Etienne and Leroux, Justin (2016): Accounting for Needs when Sharing Costs.

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We introduce needs in the rate-setting problem for essential services, like water or electricity. The goal is to ensure that households with higher needs are not penalized, all the while holding them responsible for their consumption. We show that conventional methods like monetary subsidies cannot achieve this goal in a budget-balanced way. Instead, we characterize axiomatically two families of cost-sharing rules, each favoring one aspect—compensation or responsibility—over the other. A focal solution, dubbed the utility-free solution, emerges as a desirable compromise when households differ only in their needs. We identify specific variants of these rules that protect small consumers from the cost externality imposed by larger consumers. Lastly, we show how one can implement these schemes with realistic informational assumptions; i.e., without making explicit interpersonal comparisons of needs and consumption.

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