ABSTRACT
Economic theory has long ago explained how correct pricing of private and public goods can lead to gains in economic efficiency. However, the extent to which these principles should be implemented remains a topic for debate. On one hand, it is argued that increased water tariff is regressive and reduces equity since it could have a negative impact on smallholder farmers and those practicing subsistence agriculture (Yoduleman, 1989). Likewise, during periods of drought or scarcity, if tariff increases to the level correctly reflecting this scarcity, lower income groups may be disproportionally negatively affected (Dinar and Subramanian, 1998). On the other hand, Rogers et al. (2002) argue that increasing the water tariff can improve equity. Higher water rates and, thus, higher income allow utilities to extend services to those currently not served and those currently forced to purchase water from vendors at very high prices. Besides, the price policy can help maintain the sustainability of the resource itself.
When the tariff of water reflects its true cost, the resource will be put to its most valuable uses. Table 6.1 lists the three generally accepted effects of price policy: demand reduction, efficient reallocation of the resource, and increasing the supply. In addition, Rogers et al. (2002) argue that if water resources are managed in an integrated manner where the economic, legal, and environmental aspects complement each other, increased prices do improve equity, managerial efficiency, and sustainability of the resource ("water resources" meant to include surface water, groundwater, and reclaimed wastewater).
