Using Prices to Manage Water Scarcity
22 Pages Posted: 13 Aug 2019
Date Written: August 9, 2019
Water scarcity reflects an excess of demand over supply and risks turning into shortage if that supply should fall below daily minimum needs for drinking, washing, irrigation and so on. This paper explores the factors affecting the supply and demand for water as an economic good and explains how to price retail water for municipal and industrial users or market water among irrigators. The key to successfully managing water scarcity is a price that constrains aggregate demand while covering the costs of reliable supply. Public acceptance of water pricing depends on policies that protect the poor and environmental flows, i.e., policies that set aside "social water'' before allocating water among economic uses.
Keywords: water scarcity, price incentives, elasticity, climate change
JEL Classification: Q25, Q54, Q56, Q57
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