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Review of water
pricing theories and related models
Ghazali Mohayidin1, Jalal
Attari2, Ahmad Sadeghi3* and Md Arrif
Hussein3
1Faculty
of Business and Management, Open University Malaysia Jalan
Tun Ismail, 50480 Kuala lumpur, Malaysia.
2Department
of Water Engineering, Faculty of Water Engineering, Power
and Water Vafadar, Exp’way, Shahid Abaspour Blv, Tehran,
I.R. Iran.
3Department
of Agribusiness and Information Systems Faculty of
Agriculture, University Putra Malaysia, 43400 UPM, Serdang,
Selangor, Darul Ehsan, Malaysia.
*Corresponding author. E-mail:
sadeghi_ahmad@yahoo.com
Accepted 19 November, 2009 |
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Water is vital for life and plays an essential role
for economic development of countries. To address water
scarcity issues, better pricing has been recognized as an
important tool. In this paper several empirical studies
which highlight water pricing theories and related models
have been reviewed. These theories explain different aspect
of water pricing that can be used as a means to improve
water use efficiency. Analysis of partial equilibrium can be
viewed as effects of a policy on a specific sector like
agriculture, but an analysis of general equilibrium often
involves steady-state paths which is in fact a macro-level
approach. A comparison of first best pricing with second
best pricing models shows that the latter are possible when
transaction costs are included. In the absence of storage
capacities limits and direct costs of water, development
decision studies find that the price of water held in
storage must rise at the rate of interest and that the
effect of discounting is to cause a cycle in the water
price. Finally, recent evidence suggests that the short-run
efficiency of marginal cost pricing can be extended to
account for long-run fixed cost considerations.
Key words:
Water pricing,
marginal value product pricing,
partial equilibrium,
general equilibrium,
marginal cost pricing, average cost pricing. |
