Water pricing under joint benefits - A case study of accounting for positive externalities

Water pricing, particularly for irrigation, has frequently been criticized on grounds that it is a subsidy to the water users, since the principle of full-cost recovery is not followed Full-cost, recovery-based prices are considered economically efficient since they reduce waste by encouraging water conservation and lead to optimal allocation of resources in the region. Much of these conclusions are arrived at by totally ignoring the joint private/public nature of benefits that result from such projects. Irrigation results in benefits to the region in terms of regional development and other activities that would not be possible without such irrigation and water supply development projects. Under the condition that such project provide joint private and public benefits, how should user fees be determined? This issue is raised in this paper using a case study of water supply projects in Southwest Saskatchewan, Canada. A major conclusion of the study is that ignoring public benefits would lead to user fees that could not be afforded by the water users. However, economic logic suggests that under the presence of positive externalities, these external effects should be duly considered in determining user fees. Failure to ignore such externalities may result in water use being curtailed to the level that the projects would lose their original mandate for which they were created in the first place.