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Water pricing

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by Piotr Matczak, Darryn McEvoy, Ilona Banaszak, Adam Chorynski

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Increasing economic pressures on water resources are causing countries to (re)consider various mechanisms to improve water use efficiency. This is especially true for irrigation agriculture, a major consumer of water. "Getting prices right" is seen as one way to allocate water. However, the accomplishment of this task remains a debatable issue. Methods of allocating water are sensitive to various physical, social, institutional and political settings, making it necessary to design allocation mechanisms accordingly.
Extreme event: Drought
Type of option: Insurance and financial incentives; Management best practice
Risk management: Risk transfer
Sector: Water resources
Landscape type: Geographically non-specific
Location: Australia; France; Spain; other
Drivers of change: Socio-economic: Increasing economic pressure on water resources, improved living standards, growing demand for environmental quality.

Policy: Governments trying to find better ways to manage their available resources.
How and who:
Implementation: Regional

Institutional context: Water resources are prone to market failures that must be addressed by institutions in order to yield efficient allocation and use.
Potential barriers: Water markets are not always viable due to necessary institutional and physical structures that may or may not be available.
Implications for sustainable development:
Implications for sustainable development: Potentially might increase the volume of water in natural reservoirs
There are trade-offs between efficiency and equity, the use of water allocations to address poverty.
While efficient allocations can help to meet increasing water demands, debate continues regarding the role of irrigation and farming as a development tool and as a means to redistribute wealth to both producers and consumers via cheaper staple food prices. Marginal cost pricing and water markets will serve to increase the cost of irrigation water for most farmers globally, and in areas where the scarcity value of water is high, may force subsistence-level farmers out of production. In such cases (tradable) water quotas, which can be better tailored to equity considerations, may be the preferred mechanism of allocation.
knowledge transfer:

A governmental speech on water pricing in Australia

Environmental and economic impacts of water pricing in agriculture
Evaluation: Optimal pricing scheme is characterized, first by higher marginal prices and second by a lower fixed charge. However, moving towards efficient prices does not result in important direct welfare effects.
Scientific references:
Garcia, S., A. Reynaud (2004). Estimating the benefits of efficient water pricing in France, Resource and Energy Economics, Vol. 26 (1): 1-25.

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