Water Tariff Reform: Comparative Analysis

Abstract

This paper proposes a way to formalize and compare different scenarios of transition to efficient water tariffs in a framework of representative agent model with two sources of water supply: groundwater with fixed stock and natural water inflow, and surface water that serves as a backstop technology. Two ways of refor­ming water tariffs are proposed: gradual increase in tariff (called liberalization) and multipart pricing with first block sold at pre-reform low tariff and additional water purchased at free market price (called rationing). Under rationing the amount of water offered at regulated price gradually diminishes. The analysis demonstrates that if both reforms are of the same time period length, rationing is preferred over liberalization from the social welfare point of view.