An Econometric Estimation of Deadweight Loss in Pennsylvania’s Water Market

Industrial water demand in the state of Pennsylvania is anticipated to increase in the near future due to the expansion of hydraulic fracturing of the Marcellus Shale. Penn- sylvania’s water markets are increasingly operated by investor-owned water monopolies, and have prices regulated by the Pennsylvania Utility Commission (PUC). The PUC’s decisions on whether to approve or deny changes in the price of water can take up to nine months. This thesis estimates the quantity of deadweight loss attributable to this regulatory lag in Pennsylvania’s water markets in a scenario of increasing demand. In this work, the model for a natural monopoly facing a price ceiling is defined, followed by an estimation of the relevant cost and revenue curves for a representative Pennsylvania water monopoly, after which residential and commercial water demand were estimated, with deadweight losses then being calculated. Demand is then increased such that mar- ket price would exceed the PUC-approved maximum price, which is then charged while the hearing and petitioning process occurs. This analysis calculates increases in esti- mated deadweight loss of 92.83% for the residential water market, and 40.46% for the commercial market. This finding indicates that if maintaining market efficiency is a goal for the PUC, this commission should aim to respond as dynamically as possible to changing market conditions when regulating monopoly water pricing.