Abstract
The objective of this study is to define an efficient pricing scheme for irrigation water in conditions of unmetered water use. The study is based on a principal-agent model and identifies a menu of contracts, defined as a set of payments and share of irrigated area, able to provide incentives for an efficient use of the resource by maximizing social welfare. The model is applied in the case study of the Çukas region (Albania) where irrigation water is not metered. The results demonstrate that using a menu of contracts makes it possible to define a second best solution that may improve the overall social welfare derived from irrigation water use compared with the existing pricing structure, though, in the specific case study, the improvement is small. Furthermore, the results also suggest that irrigation water pricing policy needs to take into account different farm types, and that appropriate contract-type pricing schemes have a potential role in providing incentives to farmers to make irrigation choices to the social optimum.
Highlights
In several countries, statistical evidence shows a decline in the quantity and quality of water resources in recent years, accompanied by increasing concern for future availability [1,2,3,4,5]
The objective of this study is to design an efficient pricing scheme in conditions of unmetered water, using empirical information from a region in Albania. This objective was reached by using a mechanism design approach that makes it possible to identify a menu of contracts discriminating among farmers and is implemented assuming that the Water Users Associations (WUAs) seeks to motivate farmers to use the optimal amount of water in a context of asymmetric information
The method is based on the application of a menu of contracts as an instrument for the assessment of possible improvements in water pricing in conditions of asymmetric information regarding water use by farmers, and follows the method implemented by a recent paper [19]
Summary
Statistical evidence shows a decline in the quantity and quality of water resources in recent years, accompanied by increasing concern for future availability [1,2,3,4,5]. Population growth, and increased food demands are causing tensions and competition for water resources. These pressures on water resources are leading many countries to (re)think their water policies in order to improve water use efficiency [4,6,7,8,9,10,11]. In many countries, pricing systems for irrigation water have been improved in recent years, as new water contracts have replaced older tariff systems that were designed at a time when water was less scarce, or when there was lower awareness of the issue of water conservation. There are noteworthy disparities among and within countries with regard to irrigation water prices and pricing systems, and in the ways in which irrigation water is used [15,16]
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