Water pricing: what it is, how it works, and how it can support vulnerable communities

In an interview, Professor Quentin Grafton briefly discussed the value of water pricing. Water pricing is a very broad and exhaustive topic, as water pricing can be done in a seemingly endless number of ways, depending on the context. This article looks at the issue of water pricing and explores the very basics of what it is, how it could be set up, and how pricing can be established to support vulnerable communities.

Water is a finite resource, and as our supplies dwindle through usage and pollution, decision-makers are posing the question — what is water worth?

The fourth of the Dublin principles states that water has an economic value in all its competing uses and should be recognized as an economic good. How this economic value translates into the pricing for vulnerable communities is a governance challenge that has been addressed in many different ways across the globe.

Water pricing can be controversial. It is a resource all people need to live, so it cannot be too expensive to afford, but it cannot be priced so cheaply that it is used irresponsibly.

“If there’s too much water being used… you have to say well, you know that’s groundwater and there’s only so much left … you have to do something about that. In a crisis situation, you’d want to have all the options on the table and think them through carefully and think about the consequences of not having water pricing, which is very severe.” Quentin Grafton, Professor of Economics, Australian National University

Water pricing in support of vulnerable communities

Noel Wai Wah Chan’s, ‘Urban water pricing: equity and affordability’ discussion paper for the Global Water Forum explains that there is a global view that water prices must increase to fund the expansion of water services delivery networks. However, in many developing countries insufficient infrastructure prevents poor communities from accessing water and sanitation.

Chan explains that improving water and sanitation services yields numerous social benefits, which could point toward disregarding water pricing and offering water free of charge, or at a low price instead. The thinking here is — why should people have to pay for clean water when it is an essential substance for survival and good health?

However, she says, in those cases, revenue from water cannot cover the cost of its provision, leading to increased water scarcity and related effects including rights conflicts and pollution.

Water pricing creates “greater economic efficiency… hence, higher social welfare can be achieved through raising water prices during periods of low water supply to achieve the same reduction to total water consumption.”

This is related to water being subject to the ‘tragedy of the commons‘. When water is free and freely available, there can be little to no incentive to limit consumption. The infrastructure and a guarantee that water is of good quality does have a cost associated with it. Also, paying an appropriate price allocates a value from the user perspective — psychologically we generally value thing less when they are free compared to when we have to pay something. The price should not be cost-prohibitive, or too expensive for someone to be able to meet their basic cooking, drinking, and personal hygiene requirements. The price should be enough to contribute to if not fully allow for cost recovery associated with the provision of good quality water to whoever needs and uses it.

Methods of water pricing

There are different methods of water pricing, both in place, and suggested for future policymaking. These methods vary depending on locale, water availability, and user demographics. Chan outlines numerous options in her paper.

Water supply augmentation projects create more water as an available resource, which can take the burden off of systems and allow for more affordable pricing. Increasing block tariffs are a popular method of water pricing, providing the essential amount of water for drinking, food preparation, domestic cleaning, and sanitation at a very low price, or for free. Water consumed beyond that amount costs more, in increasingly more expensive blocks. This ensures people have basic access to water while encouraging sustainable use.

Government policies for income support and payment assistance help ensure social equity and efficient water pricing, says Chan, and ideally, governments should implement both responsible water pricing, and social support policies.

Read more about Australia’s experience with water pricing in an Aither Report on Valuing Water, which can be reached from the AWP publications page.

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