Urban Water Management with a Full Cost Recovery Policy: The Impact of Externalities on Pricing

Abstract

Water has complex cost dimensions and is considered a scarce commodity under a reduced-recycle-reuse system with a full cost recovery strategy. The impact of externalities from the social, economic, and ecological aspects of exploiting water resources are often not accounted into the pricing mechanism. We discuss the current work model as well as a pricing strategy for a water infrastructure program with a full cost recovery strategy. Single and multi-block pricing models are created, and their effect on water pricing is discussed. The impact of externalities is accounted for, and respective cost components, namely, environmental cost, opportunity cost, and ecological imbalance cost are included in the water pricing, to analyze the impact on the cost of produced water. A comparison under the normalized, single-block and multi-block pricing strategy are discussed and the payback period is found. It is seen that the unit cost of potable and non-potable water is brought down from 0.94 USD/m3 and 0.51 USD/m3 to 0.62 USD/m3 and 0.29 USD/m3, respectively using a multi-block pricing strategy. It is recommended that policy interventions in a full cost recovery water pricing strategy should consider the cost of externalities with a multi-block pricing system for breakeven in water infrastructural investments.