Potential for marginal cost pricing in water resource management

Abstract

Demand management through pricing is assessed as a means to control use and influence ipvestment in water resources. In the a•essment of various pricing policies, trade offs are cPnsidered' economic efficiency, investment information, administrative and transaction Costs, equity, and political acceptability. On the basis of these trade offs, eight water re-Source areas are evaluated for their potential for improved pricing. Four areas in water resources show promise for using improved pricing policies' municipal water services, industrial and municipal sewerage, navigation, and flood damage reduction and shoreline protection. Four other areas for various reasons present serious problems' outdoor recreation, fish and wildlife habitat, irrigation, and hydroelectric power.An increase in the consumption of a commodity produces a benefit to the consumer. Every expansion in output usually requires, however, the withdrawal of resources from the production of some other item. Therefore the expansion of output entails a cost to the would-be consumers of forgone alternate products and services. The general role of prices is to balance benefits and costs at the margin, i.e., to assert proper checks and balances on both production and consumption in any economy. Therefore prices have two functions' to dis-.:courage excessive consumption of a commodity and to induce the desired supply of that commodity. Prices can act not only in the marketing of private goods but also in regulating the production and consumption of certain commodities produced by governments.In a perfectly competitive economy free from the problems associated with externaltries and public goods, prices are determined by an automatic, impersonal market mechanism that adjusts prices so that the quantity of goods demanded equals that of goods supplied. When prices are determined in this setting, all economic choices are efficient; i.e., real income is Copyright (•) 1973 by the American Geophysica, 1 Union. maximized. Therefore under conditions of perfect competition a pricing policy is not required. Pricing policies are reserved for the cases in which perfect competition is not approximated.Various forms of market failure provide the rationale for providing public water services [Bator, 1958]. Therefore the central issue in water resource management should be the design of a proper pricing policy. Of the many pricing policies available, marginal cost pricing is most conducive to the efficient allocation of resources. The efficiency with which the nation's water resource services are produced and consumed can be improved considerably if the general principles of marginal cost pricing are used as a guide in evaluating water pricing policies.The authors have reviewed the current pricing practices and prospects for improvement in major areas in which water services are provided today [Davis and Hanke, 1971b]. These include federal, state, and local agencies and public utilities such as water companies and irrigation districts. We have concluded that the areas of na...

Economics of Water Resources: From Regulation to Privatization

“…Howe (1976), for instance, points out that even in the USA, prices charged for irrigation water provided by public agencies are usually nominal and unrelated to either the cost of supply or the values derived. According to Milliman (1963), Warford (1966), and Hanke and Davis (1973), prices charged for domestic water supply or sewage disposal are seldom arrived at through a market-type interaction between supplies and users of such services. The reasons for this situation, according to Bower et al (1984), are, first, that in most societies the services of natural watercourses, such as the removal and dilution of wastewater, are not privately owned; second, the services with which these waste-removal services compete (such as the provision of recreational opportunities) are usually considered common property; finally, levels of water supply and of water prices have often been made by administrative decision.…”

THE ROLE OF USER FEES AND CONGESTION TOLLS IN THE MANAGEMENT OF INLAND WATERWAYS1

“…Alternatively, if prices exceed marginal costs, resources will be underused. When prices are equated to marginal costs, the appropriate amount of transport resources will be produced, the appropriate intermodal mix of services will be produced, and the appropriate mix of inputs will be used to produce each type of transport service, because costs to the user of transport "highways" will properly reflect the relative scarcities of inputs they use (Hanke and Davis, 1973).…”

Allocating the costs of multi-purpose water resource development: a case study of Chi-Chi Weir in Taiwan

“…If a public utility is overseeing water resource facilities, then the basic consideration in cost allocation is that total income must cover total cost to avoid the creation of profit. In addition, if the price of water is set by a governing agency such that total cost is covered, this is called the ''Average Cost Method,'' which is widely used most agencies allocating water (Hanke and Davis 1973;Loughlin 1977). Based on the principle of efficiency, each party must pay the cost of the water, and this cost should reflect the marginal cost (MC) of water; this is the so-called MC method, meaning that the price paid by a water user should reflect the MC rather than average cost (Billings and Agthe 1980;Colander and Haltivanger 1979;Gibbs 1978).…”