Ability to pay is a principle whereby individuals are charged according to their income. In cases where tariffs are to be set for a common good, such as water supply, the unit cost is usually the same irrespective of the income of the individual. However, where a user has a greater need for a resource, such as an industry needing larger amounts of water than a normal household, an incremental tariff can apply where say the first hundred units are charged at one rate, the next hundred units at a higher rate and so on. This provides the lower end users to avail themselves of the resource at an affordable rate and encourages higher end users not to waste the resource.
In the case of households on or below the poverty line, although they may appreciate the value of a resource (such as water, education or health), they simply lack the funds to pay for it. In this case the Annual Poverty Incidence Survey can provide a useful guide to what tariffs would be acceptable for this income group. For example, water districts are required by the regulator, the Local Water Utilities Administration (LWUA) to set lifeline tariffs (for consumption up to 10 cubic meters per connection per month) to be within 5% of the monthly income of the lowest income group in the community.