Study On Urban Water Price Regulation Based On Game And Improved Baron-Myerson Models

Water is the non-renewable resource on which human depends for survival. Urbanwater supply is an important industry that supports the existence and development of thecity. With the lifting of living standards, the demand for better urban water supplyservice is increasing, and price rise for water may attract the attention of manystakeholders. However, because of the natural monopoly of urban water supply industry,while government conducts price regulation, severe asymmetric information existsbetween government regulator and water supply enterprises, which includes informationasymmetry in cost and demand. Due to information asymmetry in cost, water supplyenterprises are likely to report higher cost. Due to information asymmetry in demand,water supply enterprises are likely to product implicit output.In this paper, a game model of cost audit is built to reveal the root-cause thatenterprises conceal the real cost, at the same time, testing the impact of penalty, amountof falsifying cost and audit cost to equilibrium. On this basis, Baron-Myersonmechanism is employed for price regulation of unban water supply industry, aiming tomotivate enterprises reporting real cost. The demand function of Baron-Myersonmechanism is revised, using double logarithmic model including price and incomeelasticity. Various scenarios considering asymmetry of both cost and demandinformation is analyzed. Finally, taking Shenzhen City as an example, the effectivenessof the improved mechanism model is verified with empirical data. The deficiency of thisstudy is given and future research directions are proposed.