Water Distribution and Market Power

Abstract

Billions of dollars will be spent globally to upgrade water infrastructure in the coming years. The standard economic prescription is privatization and the introduction of water markets. A major lesson from the recent privatization debacle in electricity is that prescriptions for reform must include recognition of the technology for generation, distribution, and end-use. We apply this approach for water by comparing alternative institutions that have market power in each of these micro-markets with benchmark cases - social planning and a business-as-usual regime. An illustration shows that the business-as-usual regime with market failure may be preferred to a water distribution monopoly, while both may be dominated by monopoly power in the input or output markets. However, if the policy goal is to maximize the size of the grid, the distribution monopoly does best.

Keywords: Infrastructure, Market Power, Privatization, Public Goods, Spatial Models

JEL Classification: H41, Q25, Q28