The role of prices in managing water scarcity

Abstract

Water scarcity turns into shortage when water supplies are mismatched with user demands. After clarifying the different social and private uses of water, I explain how to use prices to allocate treated (“utility”) water among municipal and industrial users and untreated (“raw”) water among irrigators. Assuming institutional capacity, successful management of water scarcity requires prices that constrain total demand and revenues that cover the cost of reliable supply. Public acceptance of effective water pricing requires that policies protect the poor and the environment, i.e., policies that prioritize “social water” over water competitively allocated among economic uses.