Enhancing the performance of water prices and tariff structures in achieving socially desirable outcomes

Water prices can convey critical information regarding scarcity, availability, and opportunity costs. Carefully crafted water tariffs enable public officials to achieve socially desirable objectives, such as providing subsidies to poor households and discouraging inefficient water use by higher-income households and commercial customers. Yet water tariffs have not been fully successful in generating desired outcomes, particularly in urban areas of developing countries. Some of the shortcomings of water tariffs in light of the desired goals of equity, efficiency and sustainability are reviewed. Experience with increasing block-rate tariffs is highlighted, and the potential usefulness of a volume-differentiated tariff in conveying subsidies to poor households in developing countries is demonstrated.