This chapter provides a comprehensive literature review of efficiency studies in the water sector, and then focuses on the literature on environmentally adjusted efficiency methodologies. In this direction, a specific interest is in the extent of water leaks in the supply network. This chapter takes into account different points of view. One of them is the economic point of view, which considers that water leaks are non-revenue water with a negative impact on sector efficiency. From an environmental point of view, leakages cause inefficient energy use in the water supply network, and may also affect water quality by increasing susceptibility to contamination under low-pressure conditions. The chapter evaluates the efficiency of municipal water suppliers in terms of water leakages, with the aim of demonstrating how inefficiency in the supply process can negatively affect urban water users. It also presents different methodologies that allow us estimate the efficiency level of municipal water suppliers.

Efficient wastewater management results in significant environmental and health benefits. Because some of these benefits do not have a market price, traditionally they were not considered in financial analyses of wastewater treatment projects. However, economic assessment through cost-benefit analysis considers it fundamental to integrate market and non-market impacts derived from the project to be evaluated. Without this, there is an underestimation of the benefits derived from implementing efficient wastewater treatment systems. In other words, evaluation of the environmental and health costs of no action is necessary to justify suitable investment policies in efficient wastewater treatment. The estimation of the environmental costs of no action requires application of economic valuation methods since the value of such costs cannot be obtained directly from marketable transactions. There are two approaches to achieve this aim. The traditional approach involves methods based on the demand response in light of the neoclassical view that economic value arises from the interaction between an individual and an environmental asset as an expression of individual preferences. An alternative approach, pursued in this chapter, is to estimate the shadow prices of pollutants that would be removed as a consequence of the implementation of an efficient wastewater treatment. This alternative approach is derived from a ‘cost of production perspective’ and uses the concept of distance function to estimate shadow prices. They represent the value of external effects that could damage the environment if wastewater is inefficiently managed. Several empirical applications verify the reliability and usefulness of estimating shadow prices of wastewater pollutants as a proxy to estimate the environmental costs of no action.