Effective Drinking Water Pricing, A Case Study of Arak City

Document Type : Research Paper


1 Member of Academic Staff, Department of Economics, Shahriyar Branch, Islamic Azad University

2 Deputy Manager for Logistics and Coordination, Iran Water and Wastewater Co., Tehran, Iran

3 Deputy Manager for Planning and Development, Iran Water and Wastewater Co., Tehran, Iran


Drinking water pricing is a major challenge facing the water and wastewater industry in Iran where decisions of water pricing are essentially based on social, legal, administrative, and financial criteria with only a slight heed, if any, paid to economic considerations. Generally speaking, the price of water in Iran reflects a percentage fraction of the costs of water production and distribution while an economterically efficient model of water pricing is absent. This failure to account for economic considerations in water pricing has turned water into a commodity supplied either at a very low price or free of charge in cases. The current situation of water scarcity which is complicated by a multitude of environmental problems can only be ascribed to the present water pricing policies. It is, therefore, essential for the water sector to employ economic tools, adopt relevant approaches, and execute optimized strategic policies in an attempt to reduce the negative impacts of the imminent water crisis. Based on the above considerations, the present study was designed to investigate and review optimal water pricing policies at Arak Water and Wastewater Authority which functions as a business offering both domestic and non-domestic water services. The cost function considered is a translog one and the seemingly unrelated regressions are used for estimation. Results show that the domestic water price levied from customers covers only 33% of the total production and delivery costs such that Arak Water & Wastewater Authority practices the economy of scale in producing both domestic and non-domestic water. Considering the fact that pricing based on the marginal cost under the conditions of economy of scale leads to financial losses for Arak W&W Authority, it seems appropriate to calculate the second best price as suggested by Frank Ramsey. Thus, the marginal cost was combined with the price elasticity for the domestic water demand in the different seasons of the year to obtain the second best prices proposed for the different seasons. Results indicate that water prices during the high demand months of spring and summer should be higher than the marginal cost while it must be below this level during the low demand months of fall and winter.


Main Subjects

  1. Rogers, P., de Silva, R., and Bhatia, R. (2002). “Water is an economic good: How to use prices to promote equity, efficiency, and sustainability.” Water Policy, 4(1), 1-17.
  2. Molinos-Senante, M., Maziotis, A., and Sala-Garrido (2016). “Estimating the cost of improving service quality in water supply: A shadow price approach for England and Wales.” Science of The Total Environment, 539, 470-477.
  3. Swallow, S., and Marin, C.)1988(. “Long-run price inflexibility and efficiency loss for municipal water supply.” Journalof Environmental Economics and Management, 15, 233-247.
  4. Renzetti, S. (1992). “Evaluating the welfare effects of reforming municipal water prices.” Journal of EnvironmentalEconomics and Management, 22, 147-192.
  5. Fallahi, M.A., Salehnia, N., Ansari, H., and Davari, K. (2009). “Urban water pricing based on Ramsey mode, case study Neyshaboor city.” Iranian Journal of Economic Research, 38, 217-242. (In Persian)
  6. Garcia, S., and Reynaud, A. (2004). “Estimating the benefits of efficient water pricing in France.” Resource and Energy Economics, 26, 1-25.
  7. Howe, C.W, and Linaweaver, F.P. (1967). “The Impact of price on residential water demand and its relationship to system design and price structure.” Water Resources Research, 3(1), 13-32.
  8. Carver, P.H., and Boland, J. J. (1980). “Short-run and long-run effects of price on municipal water use.” Water Resources Research, 16 (4), 609-616.
  9. Lyman, R.A. (1992). “Peak and off-peak residential water demand.” Water Resources Research, 28(9), 2159- 2167.
  10. Sajadifar, S.H., and Khiabani, N. (2011). “Modeling of residential water demand using random effect model, case study: Arak city.” J. of Water and Wastewater, Vol. 22 No. 3 (79), 57-66. (In Persian)
  11. Kim, H.Y. (1995). “Marginal cost and second-best pricing for water services.” Review of Industrial Organization, 10, 323-338.
  12. Garcia, S., and Reynaud, A. (2004) “Estimating the benefits of efficient water pricing in France.” Resource and Energy Economics, 26 ,1-25.
  13. Park, S. Y., Lee, K. S., and Yoo, S. H. (2016). “Economies of scale in the Korean district heating system: Avariable cost function approach.” Energy Policy, 88,197-203.

Saal, D., Parker, D., and Weyman-Jones,T. )2007(. “Determining the contribution of technical change, efficiency change and scale change to productivity growth in the privatized English and Welsh water and sewerage industry:1985-2000.” J. Prod. Anal., 28,127-139