Issues in water pricing

Green C. Issues in water pricing, 2005, Middlesex University. (На англ. / Проблемы цен на воду). ABSTRACT. The perfect competitive market of the economic textbook does four things: 1. Determines the optimum level of supply. 2. Allocates that supply between competing uses. 3. Ensures cost recovery. 4. Induces behavioural change in both the suppliers and the consumers. Not only does such a market perform all four functions automatically, it is also homeostatic, returning to the optimum after any disturbance in either supply or demand. The fundamental condition for a perfect competitive market to exist is that none of the suppliers or consumers have the power to influence the total quantity of the good or the price at which that good is traded. A second condition is that transaction costs, the costs of acquiring information and doing business, are so low that they can be ignored. This paper explores a number of the ways in which extrapolating this perfect competitive market model to water results in misleading conclusions because water differs in fundamental ways to the assumptions underlying a perfect competitive market model. In particular, I will propose a resolution to the problem which Rogers et al (1998) identified but to which they did not provide a viable solution: how to allocate water when the marginal costs and externalities, as well as marginal values, vary between uses. Secondly, I will show the traditional collective provision of water can be more efficient than a market based approach and that whilst the conventional rule of equating marginal cost to marginal value indicates how much water should be supplied, marginal cost pricing should not then be applied. Indeed, the traditional approach of property tax, and even the apparently undesirable declining block tariff approach, can be superior to a marginal cost pricing approach. Finally, I will show how, once transaction costs have been taken into account, water metering will only be viable under strictly limited conditions.