Edited by Robert Halvorsen and David F. Layton
Chapter 15: Water rate policy: prescription and practice
Water scarcity is prone to mismanagement due to influential features that obscure efficient policy choices and establish political obstacles to the installation of efficient policy. Chief among these influences are the natural monopoly character of water service, the blended rival/non-rival nature of water consumption, and the potentials to deplete groundwater stocks, reduce environmental flows, and degrade water quality. Acting in concert, these features create a tangle of challenges spanning the full theoretical range of market failures, those conditions that warn us about the capabilities of decentralization. Merely ‘letting the market work’ is not an option for processed water. Although governments can establish transferable water permits to use the naturally occurring waters of streams and aquifers and thereafter rely on administered markets to advance allocative efficiency for raw (unprocessed, in situ, natural) water, such strategies are impractical for processed water. Consequently, if we are to coax good behavior from water consumers and avert popular pressure for uneconomic water development projects, it is necessary to get the rates right and marry them with sound regulations that can be activated during harsh seasons or drought.
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