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Water 2013, 5(4), 1502-1516; doi:10.3390/w5041502

Pricing Policies in Managing Water Resources in Agriculture: An Application of Contract Theory to Unmetered Water

1
Department of Agricultural Sciences, University of Bologna, Via G. Fanin, 44, 40127 Bologna, Italy
2
Department of Statistical Sciences, University of Bologna, Via Belle Arti, 41, 40126 Bologna, Italy
*
Author to whom correspondence should be addressed.
Received: 15 July 2013 / Revised: 5 September 2013 / Accepted: 16 September 2013 / Published: 27 September 2013
(This article belongs to the Special Issue Water Policy, Productivity and Economic Efficiency)

Abstract

The paper explores how agricultural water pricing could contribute to lowering water demand when uses are unobserved (asymmetric information). The topic of the paper is justified by the fact that most water authorities worldwide do not control water uses at the farm scale. The study draws inspiration from the pricing policies of a Reclamation and Irrigation Board in Northern Italy. It analyses the optimal design of current tariff strategies with respect both to the actual regulator’s goals and the cost recovery objective of an ideal regulator driven by European Water Framework Directive principles and having full information. The analysis is based on the logic of a Principal-Agent model implemented as a mathematical non-linear programming model. Given the current pricing structure and assuming zero transaction costs, the results show a relevant increase in net benefits for the ideal scenario with respect to the actual one as water use costs increase. Benefits differences between the two scenarios mark a limit in value below which mechanisms able to solve the existing asymmetries between the principal and the agents are economically desirable. The study concludes by showing that the current regulator’s discriminatory strategy (pricing structure) would be better justified with higher levels of cost for water use. However, the existence of non-zero transaction costs related to the control of water uses points to the need for further research in order to analyze incentive mechanisms in the absence of water metering.
Keywords: unmetered water; asymmetric information; pricing schemes; water framework directive; irrigation; economic analysis; mathematical simulation unmetered water; asymmetric information; pricing schemes; water framework directive; irrigation; economic analysis; mathematical simulation
This is an open access article distributed under the Creative Commons Attribution License (CC BY 3.0).

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MDPI and ACS Style

Galioto, F.; Raggi, M.; Viaggi, D. Pricing Policies in Managing Water Resources in Agriculture: An Application of Contract Theory to Unmetered Water. Water 2013, 5, 1502-1516.

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