The economics of efficiency in water pricing regimes

Abstract

This paper investigates the efficiency of water pricing regimes in the Association of South East Asian Nations (ASEAN) covering four countries (Cambodia, Lao PDR, Vietnam and Singapore), as a step towards sustaining water resources. An overview on how pricing in the water service market is being practiced in the ASEAN region and a few countries around the world is also provided. Water pricing efficiency is determined by comparing consumer surpluses between existing water pricing regimes and Ramsey pricing, with any differences in surplus suggesting inefficiency. Results in this paper show that the approximations of optimal tariff rates based on Ramsey pricing lead to moderate surplus gains compared to IBT for all countries with the exception of Laos which experiences surplus loss. This suggests that none of the water pricing regimes currently used by the four countries are efficient pricing regimes. Implementing Ramsey pricing in these four countries can provide them with a more efficient and effective economic instrument in the form of water pricing. However, there are difficulties in the implementation of Ramsey pricing which countries will have to overcome first if they want to successfully achieve the efficient pricing of water.