Systems Analysis Approach to the Design of Efficient Water Pricing Policies under the EU Water Framework Directive

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AbstractEconomic theory suggests that water pricing can contribute to efficient management of water scarcity. The European Union (EU) Water Framework Directive (WFD) is a major legislative effort to introduce the use of economic instruments to encourage efficient water use and achieve environmental management objectives. However, the design and implementation of economic instruments for water management, including water pricing, has emerged as a challenging aspect of WFD implementation. This study demonstrates the use of a systems analysis approach to designing and comparing two economic approaches to efficient management of groundwater and surface water given EU WFD ecological flow requirements. Under the first approach, all wholesale water users in a river basin face the same volumetric price for water. This water price does not vary in space or in time, and surface water and groundwater are priced at the same rate. Under the second approach, surface water is priced using a volumetric price, while groun...