Principles of Water Supply Pricing in Developing Countries

This paper establishes a framework for water supply pricing, reviews the basic theory of marginal cost pricing applicable to the water sector, and summarizes recent tariff structures. The adaptation of the theory for practical application in relation to the objectives of water supply pricing policy results in a two-stage procedure for tariff setting. First, the detailed structure of the strict long-run marginal costs (LRMC) of supply which meet the economic efficiency criterion are computed. Second, the strict LRMC is adjusted to arrive at an appropriate realistic tariff schedule that satisfies other constraints, including economic second-best and social lifeline rate considerations, financial needs, simplicity of metering and billing, etc.