Water is an economic good: How to use prices to promote equity, efficiency, and sustainability

In 1992 the Dublin Water Principles claimed ‘‘water as an economic good’’ for the first time in a UN setting. But water has been recognized as an economic good for many centuries before 1992. Throughout Europe and the early United States private water supply companies thrived in a wide variety of settings. The ‘‘sanitary revolution’’ of the 19th century saw the demand for public ownership and management of most of these companies in the name of public health. This, of course, did not obviate the need for water to be treated as an economic good, but a heavy emphasis on the public-good nature of water and its disposal led to the development of heavily subsidized public systems. With the exception of France, this was the path followed in most countries around the world. In the late 1980s, however, the World Bank and other multilateral and bilateral institutions discovered the virtues of ‘‘privatization’’ in the provision of public services and with privatization all of the attendant problems of setting tariffs and prices. There are many different ways to promote equity, efficiency and sustainability in the water sector and water pricing is probably the simplest conceptually, but maybe the most difficult to implement politically. For example, the typical command and control approach taken in most countries with respect to water management leads to large government involvement because of its needs for detailed hands-on monitoring and measurement. Using price policies, however, still requires significant government intervention to ensure that equity and public goods issues are adequately covered. This paper focuses on the role of prices in the water sector and how they can be used to promote equity, efficiency, and sustainability.