1. Safe drinking water and sanitation are particularly economic goods. (True or false?)

• False

 

2. In many countries consumers pay enough for water services. (True or false?)

• False

 

3. What is the “free water dilemma”? And what are the consequences?

• If water is for free water providers do not receive sufficient payment for its services.
• Consequently, the provider is not able to maintain the system adequately, and the quality of services will deteriorate. Eventually the system collapses, people have to drink unsafe water or pay excessive amounts of money to water vendors.

 

4. Why do we need the economics of water pricing? Name at least three points.

• Economics is the science of managing scarcity
• Economics can explain why free price-driven markets fail and water-related problems occur
• Economics can explain how problems can be solved
• Economics can show how prices can be designed to meet different societal objectives and criteria

  

5. There are several general principles involved in assessing the economic value of water and the costs associated with its provision. What does the ideal sustainable use of water require?

• The values and the costs should balance each other. Full cost must be equal to the sustainable Value in use.

 

6. What is the difference between the Full Supply Cost, the Full Economic Cost and the Full Cost of water?

• The Full Supply Cost includes the costs associated with the supply of water which are operation and maintenance costs, and capital charges.
• The Full Economic Cost of water is the sum of the Full Supply Cost and the Opportunity Cost which is associated with the alternate use of the same water resource and the economic externalities imposed upon others due to the consumption of water by a specific actor.
• The Full Cost of consumption of water is the Full Economic Cost plus the Environmental Externalities. These costs have to be determined based upon the damages caused or as additional costs of treatment to return the water to its original quality.

 

7. What are the four columns of the Economic Value of water and what do they comprise?

• The value to users; willingness to pay for water
• Return flow benefits; recharge and in-stream uses
• Benefits from indirect use; e.g. domestic use of irrigation water
• Adjustment for societal objectives; e.g. poverty alleviation, employment and food security

 

8. The Full Value of water is the sum of Economic Value and Intrinsic Value. What are Intrinsic Values and what is the problem with these Values?

• Stewardship, bequest values and pure existence values; these values are difficult to measure but they reflect real value associated with water use or non-use.

 

9. The classical economic model indicates that social welfare is maximized when the value of water, which we estimate from the Value in Use is equal to the Full Cost of water. In many cases the Value in Use may be lower than Full Cost, Full Economic Cost, and even below Full Supply Cost. Why?

• Because social and political goals override the economic criteria.

 

10. Name at least five types of economic instruments.

• Tariffs and charges
• Abstraction charges
• Pollution charges
• Water markets
• Tradable permits
• Subsidies

 

11. Economic instruments normally work best in combination with what and why?

• Legal and institutional framework, including regulation, within which individual economic agents can operate. The unfettered market will not provide revenues which can either be returned to national fiscals, retained by the service providers or earmarked for specific purposes such as environmental spending.

 

12. What is the difference between tariffs and charges?

• A water tariff is the price assigned to water supplied by a public utility generally for both freshwater supply and wastewater treatment. Water and wastewater tariffs determine the conditions of service and the monthly bills for water users in various categories and classes.
• Water charges are economic instrument implied mainly by federal governments to better control water use and water pollution by imposing a price on the use of the environment. Charge systems are one of the most frequently used economic tools to reduce the negative effects of over-consumption of water as a resource.

 

13. The following graphic is illustrating different types of water tariffs. Which types of tariffs are illustrated by the different colors?

 

• Red: Fixed price tariff
• Orange: Uniform volumetric tariff
• Purple: Increasing block tariff
• Green: Decreasing block tariff
• Blue: Two parts tariff (fixed price and decreasing block)

 

14. In the following graphic three different tariffs types are illustrated showing the price per cubic meter.

a) Which types of tariffs are illustrated?

b) If the average monthly supply cost would be 18 €/household, how much water needs to be consumed by a household to cover these costs when comparing the three tariffs?

c) How much water would a household get for 30 € comparing the three tariffs?

d) Under which tariff would a household get the least amount of water for 18 € and under which tariff would a household get the most amount of water for 30 €?

a)

• Green: Uniform volumetric tariff
• Red: Increasing block tariff
• Yellow: Decreasing block tariff

b)

• Uniform volumetric tariff: 18 €/0,6 €/cubic meter = 30 m³ need to be consumed
• Increasing block tariff: 10*0,3 € = 3 €+10*0,5 € = 8 €+10*0,6 € = 14 €+5*0,8 = 18 € (35 m³ need to be consumed)
• Decreasing block tariff: 10*1 € = 10 €+10*0,8 € = 18 € (20 m³ need to be consumed)

c)

• Uniform volumetric tariff: 30 €/0,6 €/m³ = 50 m³
• Increasing block tariff: 10*0,3 € = 3 €+10*0,5 € = 8 €+10*0,6 € = 14 €+10*0,8 € = 22 €+10*0,8 € = 30 € would pay for 50 m³
• Decreasing block tariff: 10*1 € = 10 €+10*0,8 € = 18 €+10*0,4 € = 22 €+10*0,2 € = 24 €+10*0,2 € = 26 €+10*0,2 € = 28 €+10*0,2 € = 30 € would pay for 70 m³

d)

• Both times under decreasing block tariff.

 

15. A small town in a developing country has a well-functioning water supply system where all houses are connected to the piped water supply system – even the poorest neighborhoods. An average household (7 persons) consumes 8.4 m³ of water per month. The town has a two part tariff system (a fixed charge per connection per month of 2 € and a price of 0.4 €/m³) for all domestic households in the entire town.

a) What is the daily average per capita water consumption in this town?

• 8400/(30*7) = 40l/d per capita

b) How much is the average monthly bill of an average household?

• 2 €+8.4*0.4 € = 5.36 €

c) If the average monthly bill is not affordable for the households in the poor neighborhoods how could alternative tariffs be designed for these households and how much less would they have to pay?

• Example 1: Removing the fixed monthly charge for these households. The new monthly bill for these households would be 12*0.3 € = 3.6 €. The bill would decrease by 2 €.
• Example 2: Reducing the price per m³ (e.g. 0.2 €/m³) for these households. The new monthly bill for these households 2 €+8.4*0.2 € = 3.68 €. The bill would decrease by 1.92 €.
• Example 3: Introducing an increasing block tariff (with 0.3 €/m³ for the first 5 m³ and 0.5 €/m³ for the following cubic meters) for these households. The new monthly bill for these households 5*0.3 € = 1.5 €+3.4*0.5 € = 3.2 €. The bill would decrease by 2.16 €.

d) What would happen with the water consumption pattern in these neighborhoods, if your proposed tariff system would be introduced?

• Example 1: Removing the fixed charge may result in an increase of water consumption.
• Example 2: Making water cheaper may results in an increase of water consumption.
• Example 3: If the price per m³ in the second block is high enough water use is unlikely to increase much beyond the former consumption.

 

16. What is the difference between abstraction charges and pollution charge?

• Abstraction charges levied on the extraction of raw water from rivers, lakes and aquifers by municipal service providers, farmers, industry and mining companies. Their purpose is to help regulate the over-extraction of water from these sources.
• Pollution charges which penalise the discharge of contaminated water by water authorities and companies into public water bodies or aquifers. If these are set high enough they will encourage potential polluters to change their use habits, reducing their discharges or treating their effluent prior to discharge.

 

17. What are tradable permits?

• If disagreement exists over the allocation of water from shared resources among segments of the population, a potential instrument is the creation of transferable rights to use/pollute water and the creation of efficient markets in which the rights can be traded.

 

18. What are the application field of tradable permits?

• Tradable water abstraction rights for quantitative water resource management.
• Tradable discharge permits, or tradable water pollution rights, for the protection and management of water quality.
• Tradable permits to use or consume water-borne resources, such as fish or the potential energy of water at height or the kinetic energy of water flowing.

 

19. What are subsidies (also known as a subvention) and give least two examples of how they can be used in the water and sanitation sector.

• Subsidies are a method of financial assistance paid to an individual, a business or an economic sector in order to achieve certain policy objectives.
• Example 1: Subsidies can be used to support services (e.g. provider and distributor) that cannot recover their full costs.
• Example 2: Subsidies can also be given to encourage activities that would otherwise not take place e.g. more sustainable sanitation or water management technologies.
• Example 3: Subsidies can be used to for low-income groups ensure that everybody has the possibility get affordable water services.
• Example 4: Subsidies can as well be given to agricultural or industrial sectors to ensure employment.

 

20. What is the main problem with subsidies and why are they so controversial?

• One problem with subsidies appears to be that the different objectives of any public subsidy remain non-explicit. Thus different observers may attach different levels of priority to different objectives. The political objectives behind subsidies are particularly problematic. They are rarely made explicit to the public but can have a strong impact when dealing with improvement of finances. By implementing cost-intensive subsidies, government finances mostly suffer in return.

 

21. Name at least two advantages and disadvantages of subsidies.

Advantages

• If well targeted, can have very positive effect
• Can help to balance market disadvantages for certain target groups
• Addresses access problems directly and may be better targeted
• Uses existing tariff collection and payment system

Disadvantages

• Subsidies may not increase access to poor households
• Subsidies may distort markets, and can impose extra costs
• If there are no sufficient public funds, lack of financial sustainability
• They can create expectations that cannot be fulfilled

 

22. How can economic instruments provide incentives to improve sustainable water and sanitation services and to use water resources more efficiently? Name at least three examples.

• Tariffs generate revenues to recover specific costs.
• Tariffs generate funds for necessary infrastructure and sanitation development.
• Charges send appropriate price signals to users about the relationship between water use and water scarcity.
• Subsidising tariffs for low-income groups ensure that poor households also have sufficient and affordable water services.

 

23. Pricing water is a very controversial topic and there is plenty of disagreement about the “right” way of pricing it. What are the most discussed problems? Name at least four.

• Often consumers pay too little for water supply and sanitation services. People are not aware of the real costs of providing water and sanitation. Historically services have often been heavily subsidised from governments. This is because water is a social good and it was considered a cheap and abundant resource.
• Setting tariffs is a political process that is rife with controversy. Research has shown that low tariffs are set largely for political, rather than practical, purposes.
• Tariff structures are often complex and difficult to understand for consumers. People are not generally aware about the costs of providing water and sanitation services, it is difficult for them to judge what a “fair” or appropriate price is.
• It must be considered that poor without access to public water network are already paying a high proportion of their incomes either in excessive charges for poor quality water from water vendors, or in loss of time through collecting water from distant sources.
• Disagreement about water pricing and tariff design. Tariff setting practises affects the goals of different stakeholders in conflicting ways.
• Lack of empirical data about how the application of different tariff structures affects water use for different consumer classes and whether or not price changes would affect customers' decisions to connect (or stay connected) to the water distribution system