Using prices to manage water scarcity
25 Pages Posted: 13 Aug 2019 Last revised: 15 Nov 2019
Date Written: November 14, 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 bulk water among irrigators. Successful management of water scarcity requires prices that constrain aggregate demand and cover the costs of reliable supply. Public acceptance of water pricing tools 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
Suggested Citation: Suggested Citation