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R. Quentin Grafton, Long Chu, and Paul Wyrwoll

Water insecurity poses threats to both human welfare and ecological systems. Global water abstractions (extractions) have increased threefold over the period 1960–2010, and an increasing trend in abstractions is expected to continue. Rising water use is placing significant pressure on water resources, leading to depletion of surface and underground water systems, and exposing up to 4 billion people to high levels of seasonal or persistent water insecurity. Climate change is deepening the risks of water scarcity by increasing rainfall variability. By the 2050s, the water–climate change challenge could cause an additional 620 million people to live with chronic water shortage and increase by 75% the proportion of cropland exposed to drought. While there is no single solution to water scarcity or water justice, increasing the benefits of water use through better planning and incentives can help. Pricing is an effective tool to regulate water consumption for irrigation, for residential uses, and especially in response to droughts. For a water allocation to be efficient, the water price paid by users should be equal to the marginal economic cost of water supply. Accounting for all costs of supply is important even though, in practice, water prices are typically set to meet a range of social and political objectives. Dynamic water pricing provides a tool for increasing allocative efficiency in short-term water allocation and the long-term planning of water resources. A dynamic relationship exists between water consumption at a point in time and water scarcity in the future. Thus, dynamic water pricing schemes may take into account the benefit of consuming water at that time and also the water availability that could be used should a drought occur in the future. Dynamic water pricing can be applied with the risk-adjusted user cost (RAUC), which measures the risk impact of current water consumption on the welfare of future water users.


The design of municipal water tariffs requires balancing multiple criteria such as financial self-sufficiency for the service provider, equity among customers, and economic efficiency for society. Globally, various forms of water tariffs are in use (e.g., tariffs based on fixed or volumetric charges, single and two-part tariffs, and increasing or decreasing block tariffs) but increasing block tariffs (IBTs) have become popular worldwide over the last few decades for two main reasons. Apart from the fact that IBTs incentivize households to save water by charging large volumes at a higher price, there is a widespread belief that IBTs are pro-poor. The latter would be the consequence of providing all households with a minimum amount of water at a low (subsidized) price while large water users pay higher prices. However cross-subsidization between wealthy and poor households will occur only if poor households’ consumption falls in the low (subsidized) block and if rich households consume in the higher block and pay a price that is above the average cost of supply. These two conditions are rarely met in reality and IBTs often fail to allocate subsidies to the poor effectively. There are a few examples of water utilities making adjustments to the tariff to take into account that poor households with large families are likely to be adversely affected by IBTs. However, the provision of a minimum amount of water for free (as in South Africa), the design of household-specific low-cost water allowances (as in California), or tariffs being adjusted based on household size do not usually improve the targeting of subsidies to the poorest households. The widespread use of IBTs is difficult to rationalize, in particular while knowing that the use of a (simple) uniform volumetric tariff where water provision is charged at its full cost could improve social welfare by removing price distortions and would be easier for households to understand than IBTs. This simple tariff could be combined with some consumer assistance programs to help the poorest households pay their bills.