Efficiency and Equity Considerations in Pricing and Allocating Irrigation Water

May 1995 Pricing of water may affect allocation considerations by users. Efficiency is attainable whenever the pricing method affects the demand for irrigation water. The extent to which water pricing methods can affect income redistribution is limited. To affect income inequality, a water pricing method must include certain forms of water quantity restrictions. Economic efficiency has to do with how much wealth a given resource base can generate. Equity has to do with how that wealth is to be distributed in society. Economic efficiency gets far more attention, in part because equity considerations involve value judgments that vary from person to person. Tsur and Dinar examine both the efficiency and the equity of different methods of pricing irrigation water. After describing water pricing practices in a number of countries, they evaluate their efficiency and equity. In general they find that water use is most efficient when pricing affects the demand for water. The volumetric, output, input, tiered, and two-part tariff schemes all satisfy this condition and can be efficient, although whether efficiency is short-run or long-run, first- or second-best, varies. Pricing schemes that do not directly influence water input -- per-unit area fees, for example -- lead to inefficient allocation. But they are usually easier to implement and administer and require less information. The extent to which water pricing methods can effect income redistribution is limited, the authors conclude. Disparities in farm income are mainly the result of factors such as farm size and location and soil quality, but not water (or other input) prices. Pricing schemes that do not involve quantity quotas cannot be used in policies aimed at affecting income inequality. The results somewhat support the view that water prices should not be used to effect income redistribution because water prices are a poor vehicle for reducing income inequality. But pricing schemes that involve water quota rules can reduce income inequality. The authors demonstrate this with a two-rate tiered pricing scheme combined with equal quotas of the cheaper water. This paper -- a product of the Agricultural Policies Division, Agriculture and Natural Resources Department -- is part of a larger effort in the department to implement the World Bank water resources management policy.