Water is vital for life


Water is critical for life and plays an of import function for development of each state. In the past decennaries, increasing population, urbanisation, and industrial development have increased demand for H2O which has resulted into considerable lessening in one-year renewable H2O resources per capita. On the other manus, under-pricing of H2O may convey the demander the semblance that the existent value of H2O is at the low monetary value degree which the consumers are paying. Therefore, design of H2O monetary value construction is a important issue for H2O public-service corporations and local communities to accomplish an efficient allotment of the scarce H2O resources.

A reappraisal of the pertinent literature shows that a broad scope of methods for pricing H2O has been developed over clip. These methods differ in information on which they are based, their execution methods ( Johansson et al. 2002 ) .

For illustration, in an economically efficient resource allotment, the fringy benefit from usage of the resource should be equal across user sectors in order to maximise societal public assistance ( Dinar et al. 1997 ) . Harmonizing to Easter et Al. ( 1997 ) , efficient H2O distribution is one that which maximizes the entire net benefit ability to be obtained utilizing bing engineerings and available measures of that resource.

Harmonizing to Johansson et Al. ( 2005 ) under certain conditions ( full information, no outwardnesss, perfect competition, complete certainty, and non-increasing returns to graduated table ) , markets would accomplish first-best allotments. Allocation maximising the entire net benefit is called Pareto efficient or first-best. When trades are free from authorities restraints and high dealing costs, the resulting monetary value will be equal to that determined under fringy cost pricing methods, and the resulting H2O allotment will be Pareto efficient. Likewise, in the absence of execution costs, the fringy cost of supply includes merely bringing costs, and the allotment ensuing from fringy cost pricing is Pareto efficient.

When long-term fixed costs are considered in the maximization job, Pareto efficient allotments are achieved, and if the maximization job include variable ( short-term ) costs merely, the ensuing allotments can be regarded as short-term efficient. The allotment is termed second-best efficient when maximization occurs under restraints like institutional, informational, or political restraints ( Mas-Collel et al. , 1995 ; Johansson et Al. 2000 ) .

Harmonizing to Seagraves and Easter ( 1983 ) ; Dinar et Al. ( 1997 ) and Johansson et Al. ( 2000 ) , equity of H2O distribution concerns with the “ fairness ” of distribution across clip or economically disparate groups in a society and may non be appropriate with regard to efficiency intents. For case, a Rawlsian construct of equity to look into equity in India ‘s irrigation systems is used by Sampath ( 1992 ) . It seeks to maximise the public assistance of the comfortable minority in a society, and allows one to measure reform schemes in these footings ( Johansson, 2000 ) .


In the followerss, important theories of H2O pricing will be reviewed. Besides in Figure 1, the schematic of normative theories of irrigation H2O pricing adapted from Johansson ( 2oo2 ) will be illustrated.

Partial equilibrium versus general equilibrium

Johansson et Al. ( 2002 ) stated that analysis of partial equilibrium ( PE ) can be viewed as effects of a policy on a specific sector like agribusiness. Such an analysis focuses merely on the chief agents affected by a policy. On the other manus, an analysis of general equilibrium ( GE ) includes besides other sectors or parts ( sometimes across clip ) to find the economy-wide effects of a policy. Furthermore, an analysis of general equilibrium frequently involves steady-state waies, and is in fact macro-level in attack.

Assuming the remainder of the economic system operates in a given manner, PE analyses focal points on one irrigation unit ( farm, territory, sector ) . GE analyses, nevertheless, see other parts or sectors. Sing the public-good nature of H2O proviso, the literature on the second- best theories of H2O allotment will be mentioned. PE analysis attempts to put the monetary value such that the fringy cost peers the consumer ‘s fringy benefit. GE analysis, nevertheless, examines the effects on other sectors of puting such a monetary value.

Berck et Al. ( 1990 ) explained how computational GE theoretical accounts can be used to measure policies. They believed that in calculation of direct effects of a undertaking, the GE theoretical accounts suffer from the same restrictions as a standard cost-benefit analysis does. However, for a big irrigation undertaking, computational GE allows those endogenously determined variables to be estimated.

First-best pricing versus second-best pricing

The oldest treatment on H2O pricing among economic experts is whether to monetary value H2O by its norm cost ( based on fiscal grounds of cost recovery ) or by its fringy cost ( based on the economic logical thinking of advancing an efficient usage of the resource ) .

Johansson et Al. ( 2000 ) pointed out that an economically efficient allotment of H2O is one that consequences in the highest return for a given H2O resource. He besides suggested that to achieve this effectivity, the monetary value of H2O should be indistinguishable to the fringy cost of providing an extra unit of H2O plus the deficit value of the resource.

Garcia and Reynaud ( 2004 ) mentioned that maximising societal public assistance leads a public public-service corporation to utilize marginal-cost pricing ( MCP ) . Maximizing aggregative net excess leads to the celebrated jurisprudence of equality of monetary value and societal marginal-cost,

where, ? denotes fringy shadow monetary value of H2O, and Q stands for the volume produced by a H2O public-service corporation. The shadow monetary value is positive when H2O backdowns have environmental impacts, or when H2O is scarce.

They argued that due to a figure of unfavorable judgments against fringy cost pricing ( First-best H2O pricing ) , the “ revenue-recovery rule ” has played the primary regulation in design of H2O monetary values, and therefore, the monetary value normally used by H2O public-service corporations corresponds to average cost pricing ( Second-best H2O pricing ) . This is shown by the undermentioned equation:

They besides pointed out that in a second-best universe where the budget of a H2O public-service corporation must be balanced, an alternate to average cost pricing is “ Ramsey-Boiteux ” pricing. Under a budget restraint, it ensures a maximum economic public assistance. The equation below shows this fact:

where, e denotes the monetary value snap of the H2O demand, and the term µ/ ( 1+µ ) reflects the cost of the budget restraint. Transporting out this pricing, nevertheless, requires a perfect cognition of marginal-cost and monetary value snap.

Smith and Tsur ( 1997 ) used mechanism design theory to suggest a mechanism to monetary value irrigation H2O when husbandmans are heterogenous in their production engineerings and their single H2O utilizations are unobserved. They found that the second-best allotments are possible when dealing costs are contained, but non the first-best allotments. They besides suggested that when execution is free from dealing costs, this mechanism achieves first-best allotments.

One recognized manner for finding duties in H2O sector is to retrieve the partial or full cost of irrigation services. This attack is called cost-of-service attack ( self- finance ) , and is of an just economic entreaty for public public-service corporation rates ( electricity, gas, and railroad, route, or irrigation charges ) . In this method, interpreted to intend norm instead than fringy costs, users should be charged merely an sum sufficient to retrieve the spending incurred in supplying the service.

Fringy cost alterations harmonizing to irrigation determinations which are maps of geographical conditions and seasonal differences. This fact requires that different monetary values to be charged at different times. Likewise, the fringy cost to society of presenting one unit of H2O to a husbandman at tail terminal may be higher than that of the same unit of H2O to a husbandman nearer to the beginning of H2O supply.

An advantage of fringy cost pricing is that it is theoretically efficient, and the most of import consequence from the bing H2O pricing literature is that efficiency calls for fringy cost pricing. Monteiro ( 2005 ) pointed out that pure fringy cost pricing, because of fiscal equity ( with equity worry that fringy cost pricing could enforce an undue load on the poorest ) , may non be possible or even desirable.

The fringy cost pricing improves the economic efficiency in allotment of irrigation H2O when monetary values in other private/public sectors are set at the fringy costs of production.

Lewis ( 1969 ) , cited by Sahibzada ( 2002 ) , indicates that from the point of view of advancing the efficient usage of H2O resources, H2O charges should be set at fringy costs or the equilibrium monetary value, whichever is the lower. But Small and Carruthers ( 1991 ) indicated that whenever a capacity limitation exists, the monetary value should be raised above fringy cost to a point where measure demanded peers available supply precisely ; when, nevertheless, an extra capacity exists, the monetary value of irrigation H2O should be the fringy cost for supplying.

Harmonizing to Johansson ( 2000 ) , fringy cost pricing equates monetary value with the fringy cost of providing the last unit of H2O and to compare fringy benefits of an extra unit of irrigation H2O to its extra supply cost ( a particular instance of volumetric pricing ) . However, H2O supply costs include points such as matching to care ( Easter, 1987 ) , and aggregation of H2O and the relevant fees ( Small and Carruthers, 1991 ) , societal cost ( benefit ) , scarceness, substructure, extraction cost outwardnesss ( Johansson, 2000 ) .

Basically, a resource is considered to be used expeditiously if the cost of obtaining the resource ( including the chance cost of the predating other alternate utilizations ) is the same as the benefit society makes from devouring its last or fringy unit. If the monetary value of the resource equals its fringy cost, the consumer can compare with the benefits they obtain the costs they undergo due to their ingestion determinations. If the unit monetary value differs from fringy cost, ingestion degrees are either excessively low ( for monetary values above fringy costs ) or excessively high ( for monetary values below fringy costs ) in relation to the socially optimal degree of ingestion ( Monteiro, 2005 ) .

Spulber and Sabbaghi ( 1994 ) discussed four definitional jobs associated with fringy cost pricing. For case, ( I ) due to H2O measure, quality and location, the fringy cost is multi-dimensional in nature ; ( two ) it varies depending on whether a demand increase is impermanent or lasting ( due to the composing of fixed and variable costs as determined by short and long-run demands ) ; ( three ) it varies with the period over which it is measured, that is, short-term vs. long-term fringy cost ; and ( four ) marginal cost pricing tends to pretermit equity issues. Within the periods of deficit or scarceness, if monetary values addition to the needed degree, groups with lower income may be negatively affected.

Riordan ( 1971a ) found that multistage fringy cost pricing is able to supply a 10 to 20 per centum addition in the entire net benefits. Dandy et Al. ( 1984 ) analyzed a forced H2O pricing method, and found that such a method, while being less efficient than the optimum H2O pricing derived in their theoretical account, is still able to increase benefits to society when compared to existent mean cost pricing patterns.

The spot-market pricing system developed by Zarnikau ( 1994 ) provides a theoretical account of pricing for H2O ( short-term marginal cost pricing ) that may supply some counsel towards effectual H2O public-service corporation planning schemes, and in the design of more economically efficient H2O schemes to rationing H2O in times of drouth or scarceness. This system of H2O pricing would besides supply information sing clients ‘ rating of system sweetenings or capacity additions, through the sums they really pay when capacity restraints are adhering. Short-run fringy costs must include, besides operating costs, the costs imposed by capacity restraints or by the scarceness of H2O resources, to ration the available H2O towards the utilizations of highest value.

Mitra ( 1997 ) , cited by Sahibzada ( 2002 ) , stated that puting the monetary value of a merchandise equal to incremental costs associated with incremental production is a fringy cost pricing. From an economic theory point of view, she besides indicates that when fringy cost is endlessly falling with the size of the unit due to economic systems of graduated table, it will stay below the norm cost throughout, and any monetary value based on fringy cost will non retrieve the full norm cost, therefore asking subsidisation.

Harmonizing to economic theory, when the fringy cost falls below mean cost, the gross generated by fringy cost pricing may non be plenty to retrieve the costs taking to fiscal losingss by the H2O company. On the other manus, if fringy costs rise above norm costs, inordinate net incomes made through monopoly supply of what is perceived to be an indispensable good may non be acceptable to the public sentiment or legal criterions. However, in instances where the costs for H2O intervention and bringing per unit diminutions as a consequence from additions in the figure users, fringy cost pricing will non retrieve full costs since the fringy cost will ever be lower than the mean cost.

Efficiency and equity concerns

Efficiency is a word frequently used in economical considerations. However, the word must be defined explicitly for each usage since one sort of efficiency may be achieved at the disbursal of another. The most common usage of efficiency is in economic efficiency where refers to the measure of goods or services obtained per consumer cost ( Samuelson, 1976 ) . There are many ways to depict efficiency in H2O allotment. Johansson et Al. ( 2002 ) indicated that an efficient allotment of H2O resources is one that maximizes net benefits to society, utilizing bing engineerings and H2O supplies. Dinar et Al. ( 1997 ) explained that, in the short tally, an efficient allotment maximizes the net benefits from variable costs, and consequences in equalisation of fringy benefits from usage of the resource across sectors which can take to maximization of societal public assistance. They stated that in the long tally, maximization of net benefits besides includes optimum picks of fixed inputs.

As mentioned above, Lewis ( 1969 ) mentioned out that from point of view of advancing the efficient usage of H2O resources, H2O rates should be set at fringy cost or the equilibrium monetary value, whichever is the lower. Harmonizing to Accounting, Business, Studies and Economics Dictionary, private efficiency is where a individual ‘s fringy benefit from a given activity peers their fringy cost. Private efficiency is achieved where fringy private benefit peers fringy private cost ( MC = MB ) . However, societal efficiency is a state of affairs of Pareto optimality where it ‘s impossible to do anyone better off without doing person else worse off. Social efficiency is achieved where fringy societal benefit peers fringy societal cost ( MSC = MSB ) . Consequently, monetary value efficiency means that productiveness of a factor ( for illustration H2O ) rises as the factor rate additions.

Seagraves and Easter ( 1983 ) showed that fairness concerns include points such as recovery of costs from users, subsidized nutrient production, and income reallocation. Furthermore, Small and Rimal ( 1996 ) showed some trade-offs between equity and efficiency. They simulated effects of alternate H2O distribution regulations on equity and efficiency for typical Asiatic irrigation systems.

Considerations of income allotment are sometimes used to warrant going from efficient allotments and equity or societal consciousness ( Johansson, 2000 ) . Advocates of this thought believe that consumers benefit from agricultural investings through lower nutrient monetary values, and so, should be expected to portion in retrieving the costs ( Sampath, 1992 ) . By the manner, fairness concerns sing irrigated agribusiness are besides of import when turn toing international assistance and development issues. He stated that fairness concerns sing income reallocation via irrigation allotment have become one of the major aims across assorted subjects.

Krueger et Al. ( 1991 ) indicated that subsidised inputs/outputs ( e.g. H2O ) inflict domestic societal costs, alter production determinations, and adversely affects international trade. They believed that if authoritiess were to back up husbandmans, they should happen tactful ways to make so.

Temporal or seasonal rates

Water demand and its production cost are altering over clip, and therefore H2O governments set assorted monetary values for different seasons. In summer, when conditions is warm and dry, consumers ‘ H2O demand additions, and H2O governments use higher monetary values to promote consumers to diminish their H2O ingestion. Using assorted rates in summer is the most effectual method in comparing with the usage of maximal rate in this season. While assorted seasonal monetary values reflect seasonal alteration of parsimoniousness costs, rates could be strong motivation for preservation, economical return, and equality.

Gysi and Loucks ( 1971 ) , Riordan ( 1971a ) and Monteiro ( 2005 ) argued about the investment-pricing determinations by sing block rate H2O duties and seasonal fluctuations in the monetary values. They separated nonlinear demand maps for five residential sectors. Their consequences indicated the advantages of an increasing block rate agenda combined with a summer monetary value derived function.

As mentioned earlier, Zarnikau ( 1994 ) developed a theoretical account of topographic point market pricing for charges that vary with location and clip ( including different times in a twenty-four hours ) . Consumers are expected to react to time-of-day pricing or topographic point market pricing by altering their ingestion from periods with higher monetary values to periods with lower monetary values.

Schuck and Green ( 2002 ) extended a supply-based H2O pricing theoretical account ( theoretical account of H2O pricing able to reflect in monetary value of H2O alterations in H2O supply ) in which they considered the gross limitations of H2O supplying bureaus. The theoretical account combines the techniques of conjunctive usage system direction with and the second-best ( Ramsey ) H2O pricing. They assessed the impact of the pricing policy on H2O, energy and land usage, by using simulation techniques to a H2O utilizing territory in California. Their consequences indicate that the acceptance of the supply-based pricing policy reduces H2O demand and energy usage, and increases fallowing ( go forthing the land uncultivated ) in periods of drouth, seting agricultural activities to the H2O supply of each period.

Harmonizing to Dinar et Al. ( 1997 ) and Sahibzade ( 2002 ) H2O for irrigation in France is by and large sold on binomial tariff footing. This system accounts for off-peak and on-peak costs. A peak period is identified enduring for five months from mid-May to mid-September and that it plays a cardinal function in finding of duty. Duty design is based on the aim that duties should reflect, ( I ) in the off-peak period, fringy operating costs ; ( two ) in the peak period, long run fringy capital costs plus fringy operating costs ; and ( three ) possible discharge decrease in the signifier of pollution fees.

Finally, Monteiro ( 2005 ) suggests that the development of this sort of seasonal H2O pricing methods must take explicitly into history the possibility of H2O storage.

Development determinations or capacity limitations

In his seminal article, Monteiro ( 2005 ) pointed out that finding of H2O monetary value when confronting capacity limitations has been an issue of research for both H2O supply and other public public-service corporations like electric power supply for which such determinations are by and large studied together with the determinations to spread out the system. Additionally, he found that peak-load pricing may prorogue investing in system development in comparing with other more inefficient pricing strategies.

Harmonizing to Riordan ( 1971a ) , a theoretical account of optimum H2O pricing and investing by regulated monopoly or a publically owned public-service corporation, called multistage fringy cost pricing, is based on a short-term fringy cost pricing regulation. He besides developed a general theoretical account of investment-pricing determinations to the peculiar job of taking the timing and sizes of add-ons to capacity in urban H2O supply systems. On the footing of empirical informations, typical but conjectural cost and demand curves for H2O supply are defined and incorporated into the theoretical account. He advised dynamic scheduling techniques for optimum capacity extensions and their suited timing for urban H2O supply intervention installations ( Riordan, 1971b ) .

For instances in which both supply and demand are disharmonic and seasonal, Riley and Scherer ( 1979 ) used a peak-load pricing for H2O. Three old ages subsequently, Manning and Gallagher ( 1982 ) extended the theoretical account above, and found that in the absence of storage capacity bounds and direct costs of H2O, the monetary value of H2O held in storage must lift at the rate of involvement, and that the consequence of discounting is to do a rhythm in monetary value of H2O. They observed that the Hotelling lemma sing for the optimum monetary value of an exhaustible resource available in a fixed measure is merely a confining instance of the sort of storage period, and with no bound on the ability of storage capacity to transport this measure over to the undermentioned periods.


Harmonizing to Monteiro ( 2005 ) , scarceness is a more recent apprehensiveness than capacity limitations, reflecting the fact that the common attack in lifting H2O demand in the yesteryear was to widen the H2O supply system.

There are many ways that pricing mechanisms can be used to turn to scarce resources. Seagraves and Easter ( 1983 ) indicated that during seasonal deficits, higher fringy cost monetary values should be applied in order to retrieve fixed costs to ration all of the H2O during peak demand. In 2000, Johansson pointed out that many informal allotment systems had developed in the absence of monetary values or formal markets to turn to the scarceness. For illustration, Pakistan and India have been utilizing the Warabandi system. Bali and Cape Verde have been utilizing the Subaki system and the Entornador-Entornador system severally.

Moncur and Pollock ( 1987 ) studied the job of finding the scarceness rent of H2O. They used a non-renewable resource efficient extraction theoretical account to find the rarity value and the monetary value efficient way in the hereafter. They calculated the rarity value by sing the future addition in costs originated from the necessity to utilize dearly-won catcher engineerings to fulfill H2O demand. They found that efficient monetary value would hold to be equal to fringy cost, and that fringy cost should include non merely accounting costs but besides chance costs reflected in the scarceness rent for H2O.

Sunding et Al. ( 1994 ) , cited by Johansson ( 2005 ) , investigated the alternate supply decrease schemes for environmental betterment in a multi-dimensional system. They unified certain theoretical accounts to supply a holistic rating of environmental protection policies impacting California ‘s Bay/Delta part. These theoretical accounts showed that increasing H2O costs ( irrigation decrease in channel which diverts H2O ) and labour deformations due to environmental statute law can be mitigated through H2O trading.

Laffont and Tirole ( 1993 ) , Johansson et Al. ( 2002 ) proposed to retrieve scarceness costs with another mechanism which is a set of fixed charges to equilibrate the budget. They stated that the short-term efficiency of fringy cost pricing can be extended to account for long-term fixed cost considerations.

Small and Rimal ( 1996 ) and Johansson ( 2005 ) , utilizing efficiency and equity standards evaluated H2O scarceness effects on irrigation system public presentation in Asia. They noted that optimum conveyance schemes to account for scarceness may cut down economic efficiency and equity marginally.

Easter et Al. ( 1997 ) investigated inter temporal allotments under scarceness and unsure supply ( which it may besides be related to the pick of H2O beginning and irrigation system ) which will impact the eventual H2O monetary value.

In 2001, Griffin suggested a duty construction for H2O that aims both at efficiency and gross neutrality of H2O public-service corporation. He showed that H2O monetary value should besides include chance costs such as, user ‘s fringy cost of H2O ( to take into history forfeit of future utilizations of unrenowned groundwater supplies ) ; fringy value of natural H2O ( surface H2O and to the full renewable land H2O beginnings, in scarceness state of affairss ) ; fringy capacity cost ( when H2O supplied with capacity installed is less than H2O demand ) .

Hedonic pricing theoretical account or inexplicit fringy monetary value

The hedonistic rating technique is used to disaggregate the sale monetary value of a bundled good ( i.e. land features ) to uncover portion of it matching to H2O to be able to analyse market for a distinguished good ( Latinopoulos et al. , 2004 ) . They utilized that technique to uncover the inexplicit value of irrigation H2O by analysing agricultural land values in Chalkidiki, a typical rural country in Greece that is enduring from a terrible job of irrigation H2O deficit. Subsequently, they used a sample of both nonirrigated and irrigated features, and estimated the value of irrigation H2O through disaggregating the entire monetary value of each country of land obtained by a local study. Results show that, apart from properties of typical values, the agricultural features of lands, including irrigation H2O handiness, have an of import influence on the land monetary values.

The hedonistic pricing method has been used on a regular basis in the analysis of land monetary values. Most agricultural economic experts have studied the balance between agricultural productiveness and residential demand on the urban and rural peripheries. This attack is besides used to mensurate the part of H2O value to farm monetary values. Torell et Al. ( 1990 ) estimated H2O value in the Ogallala Aquifer. Likewise, Faux and Perry ( 1999 ) obtained the H2O value in Oregon, Malheur county.

Coelli et Al. ( 1991 ) formulated a hedonistic theoretical account of farm land values. This method was used for cost benefit analysis of a public H2O supply strategy. They showed that the benefits of scheme H2O are well less than its costs.

Fringy value merchandise pricing

In 2002, Sahibzada noted that the H2O rate finding rule frequently favored by economic experts is to establish charges on the value of service, i.e. on the fringy merchandise value of H2O which peers, at equilibrium, the monetary value husbandmans are willing to pay for H2O.

Three methods of gauging the fringy merchandise value of H2O include, ( I ) The residuary imputation which deducts from gross merchandise value the costs of inputs other than H2O, and so, attributes the whole of the balance to the H2O input, ( two ) The additive scheduling technique which is good suited to gauge the fringy value of H2O ; ( three ) The production map technique which is used to deduce the fringy merchandise value of H2O. Cross-sectional, clip series and Panel Data are frequently used for gauging the value of inputs in harvest production. Conradie and Hoag ( 2002 ) indicated three options to residuary imputation:

“ The first estimates a crop-water production map from field tests and so scales this physical production map by the monetary value of the merchandise ( Colby, 1989 ) ; ( Penzhorn and Marais, 1998 ) . The 2nd attack is to gauge a demand map straight from H2O monetary value informations. Griffin ( 1985 ) presented an econometric theoretical account utilizing panel informations of irrigation monetary values in Texas. The 3rd attack is to utilize Hedonic pricing methods to mensurate the part of H2O value to farm monetary values. ”

Hussain et Al. ( 2007 ) stated that at a farm degree, the optimum value of H2O will be achieved when the value of fringy merchandise equals the fringy cost of H2O. In this instance, husbandman ‘s fringy private benefit and fringy private cost would be equal.

Harmonizing to Sunding ( 2005 ) , if the corresponding production map is differentiable, optimum H2O usage per acre with harvest I at territory J will be at a degree where the value of fringy merchandise of H2O peers the shadow monetary value of H2O.


Water rates, based on first-best pricing, are widely accepted for retrieving partial or full cost of the irrigation services. Harmonizing to Sahibzada ( 2002 ) , it is called the cost of service attack in which public public-service corporation rates has both an economic and an just entreaty. In this attack husbandmans should be charged merely a measure sufficient to cover the spending incurred in supplying the service. There exists two discrepancies of this attack: 1 ) Charging rates which cover merely current operation and care costs and is considered as partial cost recovery or the stone underside discrepancy. 2 ) Full moon cost recovery insists on charges which non merely cover care but besides yield a depreciation allowance and some net return on the historical capital costs of the irrigation channel ( Sahibzada, 2002 ) .

Sahibzada ( 2002 ) besides illustrated that mean cost pricing involve inefficiencies in H2O usage. Lewis ( 1969 ) , cited by Sahibzada ( 2002 ) , claimed that mean cost pricing would intend that a agriculturist utilizing an excess unit of H2O for harvest production would be charged less for it than it costs the community to supply. He besides pointed out that this pricing takes merely the supply side into history and ignores the demand side, and its application under both increasing ( lead to net incomes ) and diminishing ( lead to subsidisation ) norm costs leads to inefficient results.

On the other manus, pricing based on the second-best pricing is another standard that is adopted for finding rates in the irrigation H2O. Fringy cost pricing sets the monetary value of irrigation H2O equal to the fringy cost of supplying it or incremental costs associated with incremental production. Harmonizing to Dinar et Al. ( 1997 ) a fringy cost pricing mechanism, targets a monetary value for H2O to be the fringy cost of providing the last unit of that H2O. One of the most advantages of this pricing is that it is theoretically efficient. But Dinar et Al. ( 1997 ) and Sahibzada ( 2002 ) in their surveies showed that utilizing of this pricing system confronts some practical jobs such as: 1 ) Marginal cost alters with the nature of the irrigation determination with which the irrigation methods are concerned. 2 ) The fringy cost varies with the period over which it is measured ( like seasonal differences and short- tally vs. long-run ) and infinite ( the tail terminal and near to the beginning of H2O supply ) which will necessitate that different monetary values be charged at different times. 3 ) This method is hard to gauge and use in existent conditions. Therefore, pricing based on fringy cost would ask bear downing changing monetary values within a individual irrigation system and besides overtime.

Another famously accepted standard for finding rates in the H2O sector is pricing system based on value of fringy merchandise of H2O. Harmonizing to Sahibzada ( 2002 ) , in this method, monetary values will be merely low plenty so that all H2O available is used, but merely high plenty so that no husbandman wants more irrigation H2O at the monetary value confronting him. In the other word, at equilibrium, the H2O value fringy merchandise will be equal to the monetary value which husbandmans are willing to pay for H2O. On the other manus, Shiferaw et Al. ( 2008 ) pointed out where no market monetary value exists, optimum allotment of irrigation H2O will necessitate the shadow monetary value to be equal to its fringy value merchandise. Harmonizing to Dinar et Al. ( 1997 ) an allotment which equates H2O ‘s unit monetary value ( the H2O ‘s fringy value merchandise ) with the fringy cost is considered an economically efficient, or socially optimum, allotment of H2O resources.

Finally, H2O pricing mechanisms are by and large in the national involvement, and are used to increase H2O available for certain sectors or citizens ( Johansson et al. 2000 ) . They are non, nevertheless, really effectual in redistributing income. Dinar et Al. ( 1997 ) claimed that to run into this end, it is frequently necessary to supply a subsidised H2O proviso or follow different pricing mechanisms accounting for disparate income degrees ( see Table 1 ) .


Water is critical for life and is a major plus for development of each state. The theories, reviewed in this paper, explicate different facets of H2O pricing that can be used as a mean to turn to H2O scarceness issues in footings of measure every bit good as quality. The empirical findings reveal that the first-best pricing is a widely accepted theoretical account for partial or full cost recovery of the irrigation schemes as it considers inefficiencies in H2O usage. On the other manus, the second-best pricing theoretical account sets monetary value of H2O equal to the fringy cost of supplying it or incremental costs associated with incremental production. Most of the economic experts agree that if H2O users pay the fringy cost of its supply, H2O usage efficiency would be significantly improved. The fringy merchandise value is used to measure efficiency of inputs applied. In other words, a divergence of the fringy merchandise value from monetary value represents inefficient usage of input. Finally, there exists presently a argument that while H2O pricing plans promote economically and environmentally efficient H2O usage, they may non ever be appropriate as H2O pricing is frequently perceived as a policy intercession that negatively affects hapless husbandmans and little holders. It can be concluded that all of the mentioned theories consider H2O pricing as an of import tool which policy shapers can use for direction of this valuable resource.


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