Other market issues

Accompanying the discussion about urban water trade are a range of arguments that focus on urban water pricing. Popular in this context are calls for the use of ‘scarcity pricing’ to replace urban water restrictions (see, for instance, Grafton and Kompas 2007). The basic idea is that water prices should be permitted to vary in the short term to reflect the relative scarcity of the resource. Accordingly, higher prices would help choke off demand, rather than relying on punitive restrictions which impose welfare costs. In addition, the higher prices would act as a clearer incentive to drive investments in alternative infrastructure.

These arguments would have greatest credibility if genuine and complete inter-sectoral access to the available resources had been achieved or where inter-sectoral transfers are not feasible at all. Put simply, the welfare gains from scarcity pricing are likely to be severely limited unless, in the first instance, wholesale scarcity is addressed using the most cost-effective alternatives. For those jurisdictions with the opportunity for inter-sectoral trade, focusing on scarcity pricing at the household level has the potential to divert attention from the substantive gains on offer from higher-level reform. Where sectoral connectivity is problematic, clearly scarcity pricing has a more useful role[7] and should be pursued.

A second strand of arguments about urban water trade centres on the institutional design of a competitive water industry and the role of the private sector within this regime. Notwithstanding the intuitive appeal of competition, most of these questions require empirics to guide decision-makers. In addition, much of this analysis needs to be undertaken on a jurisdiction-by-jurisdiction basis, since results from these types of studies are heavily influenced by geographical variations. To the best of our knowledge, very little empirical work is available at this scale to guide the discussion and a great deal more work should be undertaken as part of settling on a national reform agenda in this field.

[7] It is worth noting the Grafton and Kompas (2007) show that scarcity pricing in Sydney would obviate the need for water restrictions, but that the city would still confront critical water shortages without significant augmentation works.