Pricing Irrigation Water: Principles and Cases from Developing Countries

Agricultural and Resource Economics Review,  Apr 2005  by Lichtenberg, Erik

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Yacov Tsur, Terry Roe, Rachid Doukkali, and Ariel Dinar. 2004. Pricing Irrigation Water: Principles and Cases from Developing Countries. Washington, D.C.: Resources for the Future, 319 pp., $65.00.

The stated purpose of this book is to draw on World Bank experience in order to provide policymakers and water managers with methods for evaluating alternative ways for pricing irrigation water under various circumstances. Such an endeavor is well worthwhile: improved pricing policies could help mitigate water scarcity problems that increasingly pose a major impediment to growth and development in many countries (see for example Gleick 2002). This book does contain important elements of a systematic framework for giving water managers and policymakers a fundamental understanding of the pros and cons of alternative pricing systems. But it ultimately falls short of providing a clear, comprehensive treatment that would be comprehensible to its chosen audience.

On the positive side, Chapter 3 develops a useful set of guidelines on water pricing (which reappear later on in an intuitively appealing narrative in Chapter 6), while Chapter 1 presents a nice overview highlighting the importance of linkages between activity at three levels: on the farm, in the water district, and in the macroeconomy. The water pricing guidelines conform to standard economic prescriptions: the desirability of marginal cost pricing, distortions due to average cost pricing, the need to keep fixed cost recovery needs from distorting pricing and therefore water use at the margin, the need for differential pricing of water from different sources or of different qualities (but not for different end uses, e.g., crops), the potential use of block rate pricing to reconcile marginal cost pricing with income distribution goals, the need to incorporate the costs implementing pricing policies into supply costs, etc. These guidelines are derived using economic principles presented at an advanced undergraduate level that should be well suited to water managers and policymakers. Demand for irrigation water is derived from profit maximization, as is supply. Irrigators' surplus and profits from water supply measure social welfare. Intertemporal considerations are treated heuristically. The main weakness is treating economies of scale in water supply only implicitly, via consideration of fixed cost recovery issues, an approach that creates some problems for the discussion of distortions due to average cost pricing (the unstated assumption is that marginal cost is greater than average cost, hence economies of scale are limited relative to demand). Overall, the treatment, while basic, succeeds in capturing many important albeit frequently forgotten subtleties.

Far less successful are the book's attempts to illustrate application of these guidelines using empirical case studies of water pricing in surface water irrigation projects in Morocco, China, Mexico, South Africa, and Turkey. Much of Chapter 4 is devoted to a description of Howitt's (1995) method of positive mathematical programming, which is used to estimate crop water demand-a topic unlikely to be of substantial interest to the book's putative audience. The analysis of a two-sector trade model (used to derive the second-best result that trade policy reform [reducing tariff barriers] can make society worse off by exacerbating distortions due to administrative water allocation) is equally unlikely to be of interest to (or comprehensible by) water managers and policymakers. Given the purported audience, it would have made more sense to relegate the technical material to an appendix (as was in fact done with the discussion of computable general equilibrium [CGE] models, used for the empirical analyses of Chapter 5).

The purpose of the empirical studies is to illustrate how to apply the general guidelines. They do not serve that purpose well, mainly because there is little thoughtful analysis of the results. For example, to illustrate the inefficiency of charging for water on the basis of land area irrigated, as is done in Mexico and Turkey, the authors simply point out that the marginal value of water differs by crop. But the authors do not consider the costs of alternative pricing methods, nor do they calculate the magnitudes of the social losses from inefficient pricing to see whether changing pricing methods would actually increase social welfare. Similarly, irrigation projects in all five of the countries examined exhibit economies of scale, so that marginal cost pricing is incompatible with full cost recovery (and hence financial sustainability of water projects). The authors refer in each case to the general guideline that the volumetric component of water charges should not be designed to recover fixed costs. Again, however, the authors seem to have no interest in the magnitude of the problem or the political and economic feasibility of alternative corrective measures. One would want to know, for example, how policies designed to achieve full cost recovery would affect farm income, land and labor in farming, crop production, and so on, in order to determine what measures should be taken to recover costs (as well as whether full cost recovery is in fact a reasonable goal).