Water Utility Pricing and Local Collective Action

Pricing water properly is a common rubric for water scarcity problems. The problem is to determine what constitutes a proper price. One foundation is pricing based on trade in a market. However, development of markets for water has been limited by issues of property rights and externalities. An alternative paradigm for pricing that may prove more available is pricing water to cover its provision cost. To develop pricing rules, this paper frames water provision as a local collective action problem: a group of water users in a given geographic area seeks to determine water supply and pricing to maximize net benefits of water use subject to cost recovery. Here, the method of pricing is combined with issues of economic organization and privatization. The proposed economic organization is co-management by private and public water agencies to achieve efficiency and cost recovery. The approach extends to cost recovery with conservation concerns and also to cost recovery with service quality aspects. Pricing parameters that cover costs can be directly determined when demand and cost functions are known. When demand functions are not available, an auction-like process can determine pricing parameters from revealed preferences