Economic market instruments and sustainable urban water use

Water is an economic good and as such has as a value to a spectrum of users, who are willing to pay for it. Consumers will use water until the marginal costs exceed the marginal benefits from use of an additional cubic meter of water. Similarly, producers will supply water until the marginal costs exceed the marginal return of an additional cubic meter of water supplied. This article surveys the insights on the desirability and possibilities for using economic policy instruments to attain a sustainable use of water. Special attention will be paid to the scope and viability of price instruments as well as to privatisation and liberalisation of the sector, since these issues feature prominently in the current policy debate. To this aim, we will offer a stylised picture of the water market for end users by devoting particular attention to the relevant characteristics of demand and supply, including market failures that warrant government intervention to regulate the market. Next, the focus is shifted to the possibilities of influencing supply and demand such that the market for water satisfies basic sustainability criteria.