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Pricing policies in managing water resources in agriculture : an application of contract theory to unmetered water

Explored is 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. [authors abstract]

TitlePricing policies in managing water resources in agriculture : an application of contract theory to unmetered water
Publication TypeJournal Article
Year of Publication2013
AuthorsGalioto, F., Raggi, M., Viaggi, D.
Paginationp. 1502 - 1516; 4 fig.
Date Published2013-09-27
PublisherMolecular Diversity Preservation International, Water Editorial Office, MDPI
Place PublishedBasel, Switzerland
Keywordsagriculture, consumer demand, economic aspects, financial management, irrigation, policies, productivity, water demand, water metering, water resources management
Abstract

Explored is 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. [authors abstract]

NotesWith 27 endnotes including references
Custom 1202.8

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