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Show CHAPTER III REVIEW OF APPLICATIONS OF WATER PRICING POLICIES GENERAL Prices are used to allocate scarce resources. Buyers offer prices that reflect their valuation of a resource, and sellers quote prices that reflect the costs of production. This suggests that over the long run revenues collected will equal or exceed costs of production ( Howe, 1967). An increase in the consumption of a commodity produces a benefit to the consumer. Every expansion in output usually requires, however, the withdrawal of resources from the production of some other item. Therefore, the expansion of output entails a cost to the would be consumers of foregone alternate products and services. The general role of prices is to balance benefits and costs at the margin, i. e., to assert proper checks and balances on both production and consumption in any economy. Therefore, prices have two functions: to discourage excessive consumption of a commodity and to induce the desired supply of that commodity. Prices can act not only on the marketing of private goods but also in regulating the production and consumption of certain commodities produced by governments ( Hanke and Davis, 1973, p. 808). User- fees are similar to market prices and provide the best results where the cost of exclusion is low, few or no consumption externalities exist, and the resulting redistribution of income appears favorable. Chapter II describes such policies as marginal cost pricing, average cost pricing, monopoly pricing, and price discrimination. This chapter looks at the various uses of water and describes the pricing policies for each use. In irrigation and M and I uses, the fees are designed to cover all relevant costs. In pollution and recreational uses, the fee is designed to cover only costs to achieve that benefit and not for the entire project. IRRIGATION PRICING POLICIES The federal government has long followed a policy of increasing the productive capacity of agriculture. This policy is based on two goals: first, insuring low food prices through abundant supplies of agricultural products; and second, improving the standard of living for the rural population. When western expansion reached the semiarid regions, the federal government began building irrigation projects. The Reclamation Act of 1902, a major landmark in federal water policy has provided massive support for irrigation of arid lands ( Howe et al., 1971). Irrigation water pricing policy of the federal reclamation program reflected the social goals of settlement and equity of opportunity for the nation's farmer. Evidence of this can be seen in the repayment policies of the reclamation program. First, irrigators are not required to pay interest charges on reclamation project costs attributed to irrigation. Second, there is a waiting period of 10 years after water delivery until the first payments must be made. Third, excess power revenues are employed to cover part of the costs of producing water for agriculture. According to one estimate, farmers pay only about one third of the costs of supplying an acre foot of water ( Brown, 1968). A study by the Stanford Research Institute ( 1958) indicated that the interest waiver alone reduced the repayment responsibility of the typical irrigator by about half. Further reduction resulted from a policy that the irrigator should not be charged more than his ability to pay. This policy charges more project costs attributable to irrigation to power users and the general tax payer. Some of the adverse effects of these policies can be readily observed. Since a significant portion of irrigation ( project) costs are borne by others, resulting in an inordinately large demand for cheap irrigation water, a disproportionate amount of project water is allocated to irrigation, and water projects may be oversized. " Agricultural output within the project service area is greater than it otherwise would have been implying that the agricultural sector purchases a relatively greater quantity of the scarce resources such as chemicals, machinery, and research talent. Because the quantitative demand for these resources is relatively greater, the other economic sectors using these resources must pay higher prices" ( Brown, 1968). To overcome some of the problems of current pricing policies, Davis and Hanke ( 1971) recommend cost- based pricing at the source for irrigation water. Beneficiaries of any new development projects would 13 |
