Incidence of Subsidies in Residential Public Services in Mexico: The Case of the Water Sector

Abstract

Access to safe water has tremendous direct and indirect impacts on poverty-related outcomes. In Mexico, economies of scale in water provision justify bulk provision of water, such that it is collectively rational to invest heavily in capital for infrastructure development. This is compounded by the fact that water utilities are highly capital-intensive. We analyze two distinct types of subsidies prevalent in the residential water sector. We exploit a household socio-economic module with detailed water services information from the 2014 National Income and Expenditure Survey in Mexico. We combined this data with a unique dataset from water operators in Mexico (PIGOO). We estimate economic (considering operating costs) and direct (considering household’s water payments) subsidies targeted to residential water tariff subsidies. Large heterogeneity in the direct subsidy incidence is found, which partly explains the distortions and wide differences in tariffs and total amount paid for water among different segments of the income distribution. The Omega Indicators (Ω), defined as the proportion of the subsidies received by the poor divided by the proportion of households in the total population in poverty, is less than one, implying that wealthy populations benefit more from water subsidies (economic and direct) than the poor.