ABSTRACT
ABSTRACT: Recent European legislation adopts the concept of full-cost recovery (FCR) as the guiding line to price water services. In this paper, the meaning of the FCR concept is analyzed and the economic rationale for its application is discussed. The basic idea here developed is that FCR is a misleading concept, since costs are by definition recovered, and the problem is to assess how it is covered. After presenting the various options available for cross-subsidization, an accounting framework for analyzing the structure of cost recovery of water services is proposed. Alternative ways of financing the service are listed according to their distance from the pure long run marginal cost, representing the theoretically optimum, though often practically unfeasible solution.
