Privatizing Water Distribution
Billions of dollars will be spent globally to upgrade water infrastructure in the coming years. The standard economic prescription is privatization and the introduction of water markets. A major lesson from the recent privatization debacle in electricity is that prescriptions for reform must include recognition of the technology for generation, distribution and end-use. The distribution of water has public good characteristics. Alternative institutions with market power in each micro-market are compared with benchmark cases - social planning and a business-as-usual regime with distribution failure. Empirical results show that privatization need not always be Pareto-improving. The regime with market failure in distribution may be preferred to a distribution monopoly, while both may be dominated by monopoly power in the input or output markets. However, if the policy goal is to maximize the size of the grid, the distribution monopoly does best. The structure of each micro-market must be examined before choosing one institution over another.
|Date of creation:||Mar 2004|
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0304, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
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