1. Increased water scarcity is fundamentally
a problem of management
By GuYing van Bommel
February 2016

2. Water scarcity is a problem facing to the world; although water is a common substance, freshwater
resources, which can directly be used by human being is scarce (drought, degraded quality). And
the freshwater resources are unevenly distributed in the world. “Anything scarce and in demand
commands a price; this is one of the basic principles of economics. Water pricing can contribute
to making water more accessible, healthier and more sustainable over the long term” (OECD,
2003). The water pricing can both be quantity based, like water-use charges or tradable permits
for water withdrawals, or quality based like pollution charges.
Based on the observation, I would like to focus this paper on analyzing the benefits and limitations
on the pricing of water:
The benefits
- Efficient and effective water pricing systems provide incentives for efficient water use.
Research shows that the water use drops when households have to pay per cubic meter,
instead of a lump sum per month. But even in the UK only one in three households has a
domestic water supply meter (Hope and Rouse, 2013). The reduction in consumption with
metering of the order of 10% (Godley et al, 2008). With metering citizens get aware of their
water use. It can be in small adjustments, like repairing a dripping tap or collecting rain
water for irrigating the garden.
An effective pricing system would be a progressive pricing system, where high volume
users would have to pay a higher price per cubic meter compared to low volume users.
This can only be done when the water use is metered.
- The effective pricing would also count water quality protection, by pricing for the disposal
of polluted water. When the polluted water is disposed to a river, it has high negative
externalities on water users downstream. When it would be possible to value these
externalities, the polluters, like chemical plants or miners, can be charged for their pollution
of the water. If these charges are high enough, the polluters will be stimulated to invest in
water treatment facilities, before they release the water to the surface water. This can be
applied to the industry. When a sewage system is available, citizens are obliged to be
connected to this system and pay for this usage.
- It generates funds for necessary infrastructure development and expansion, and provide
a good basis for ensuring that water services can be provided to all citizens at an
affordable price. The majority of the costs for water infrastructure are fixed costs, like
pipelines and sewage facilities. To maintain a healthy business, all the costs for these
water systems should be covered and reflected in the water price, otherwise future users
will have to bear the costs for replacement or lack of maintenance can cause health risks.
Industrialized countries face enormous rehabilitation costs that are largely hidden, literally
underground, which politicians defer to the future, knowing the costs will be higher and
the challenges will be more difficult.
- It stimulates innovation into water saving. A higher water price stimulates innovation in two
ways. On one side a more efficient use of the fresh water, like in agriculture drip irrigation,
which results in water savings of 50% compared with sprinkler irrigation (Miles et al) or in
green houses where they use a closed water system for irrigation.
The other way is that re-use of water becomes economically more interesting. Treated
wastewater can be used for agricultural and landscape irrigation, industrial processes,
toilet flushing, and replenishing a ground water basin, referred to as ground water
recharge. (United States EPA)
The European Union even introduced the EU Innovation Program on Water reuse and
recycling to save costs, recover materials and demonstrate environmental stewardship.
The use of non-conventional water resources through recycling and reuse can support the

3. provision of safe, available and affordable water, while decreasing energy needs,
reclamation costs and environmental impacts. (EIP-Water)
The limitations
- Clean water can become too expensive to some vulnerable groups, such as low-income
households and people live in remote areas. When clean water becomes too expensive
for vulnerable groups, they could turn to surface water for their consumption. This can
cause serious health risks, as surface water can be polluted from upstream agriculture or
industries. It is probably more cost effective to subsidize these vulnerable groups for their
clean water to avoid higher health cost.
- It makes products, especially food, more expensive. Farming accounts for about 70% of
worldwide water use, in general surface water and ground water for irrigation (OECD,
2003). In most countries farmers do not need to have permits for water withdrawals. There
are two main reasons for that: Politicians want to keep food prices at affordable level. This
holds especially in less developed countries, where households spend a large share of
their income on food. Moreover, irrigation is especially needed during draught, when food
prices are already rising. Adding extra cost by pricing the water could be a bridge too far
for politicians.
- The other reason is the difficulties of measuring the water usage of surface and
groundwater. The water pumps at millions of farmers are in general not metered. But as
water is getting scarcer, countries should look into pricing water used by agriculture. It
could start with a price for an irrigation permit.
- The price of water is often closely controlled and regulated by public authorities, and often
bears little relationship to its cost of supply, including the cost of the infrastructure, its
operation and maintenance. (Conner, 2012) For politicians it can be attractive to keep the
water price low, to gain votes. For politicians it can be attractive to keep water prices low
by only charging the variable costs and maybe a part of the fixed costs. Financial risks are
illustrated by the global financing gap of over USD 11 trillion between 2013 and 2030 to
fund the global water supply and sanitation services infrastructure. (Dobbs, 2013) The
financing gap is composed of new capital expenditure but more significantly of the renewal
of existing water supply systems. For example, it is estimated that, in the USA, water
supply infrastructure renewal will cost a total of USD 1 trillion between 2011 and 2035.
The necessary budget for long term maintenance is often be used by politicians for more
short term effect, like lower water prices. In the Netherlands an independent authority is
responsible for setting the drinking water prices. In this way the price setting is taken out
of the political arena.
Conclusion
The pricing of water can be difficult, as the economic value of water for the users is not always
clear and the environmental costs of pollution are not fully incorporated. But pricing of water is an
important instrument for a better allocation of scarce (clean) water, because it gives incentives for
water saving, a better economic allocation of water, which can lead to more economic growth and
more sustainable water use in the long term.
Reference:
Connor R. (2012), The United Nations World Water Development Report 4: Managing Water under
Uncertainty and Risk: Executive Summary, UNESCO
Dobbs R, Pohl H, Lin D-Y, Mischke J, Garemo N, Hexter J, Matzinger S, Palter R,

4. Nanavatty R. (2013) Infrastructure productivity: how to save $1 trillion a year. McKinsey Global
Institute Report. McKinsey & Co.
EIP-Water: http://www.eip-water.eu/ accessed on 6 February 2016
Godley, A., Ashton, V., Brown, J., Saddique, S. (2008), The costs & benefits of moving to
full water metering, Science Report – SC070016/SR1 (WP2), Environment Agency, United Kingdom
Hope R., Rouse M. (2013) Risks and responses to universal drinking water security. Phil Trans R Soc A
371: 20120417. Smith School of Enterprise and the Environment, and School of
Geography and the Environment, University of Oxford, United Kingdom
Miles C., M. Nicholson and M. Sonde, Efficiency of Drip and Overhead Irrigation Systems, WSU Vancouver
Research and Extension Center, Canada, accessed by
http://agsyst.wsu.edu/IrrigationSystems.html on 10 February 2016
OECD (2003), Social Issues in the Provision and Pricing of Water Services, OECD, Paris, France
United States EPA, http://www3.epa.gov/region9/waterinfrastructure/water-conserv.html, accessed on 10
February 2016