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An Incentive Mechanism for Decentralized Water Metering Decisions


  • Andrés Chambouleyron

    (IERAL - Fundación Mediterránea)


Metering water consumption has been long advocated by economists in developing countries as a way to curb waste and prevent resource depletion. However, very few of these economists have studied the inefficiencies brought about by universal metering or the conditions under which decentralized water metering decisions are optimal. The decision where to install water meters generally rests on either the consumer or the company providing the service. This paper shows that if left unregulated, both the consumer’s and the company’s decentralized water metering decisions are sub-optimal. This is because the firm when installing meters, does not take into account the fall in consumer surplus and the consumer, when voluntarily installing a meter in his dwelling, does not take into account the effect of his decision on the company’s profits. To solve this externality problem and make the decentralized decision optimal, an incentive mechanism is proposed. The mechanism works through a series of Pigouvian taxes imposed by the regulator on the party creating the externality. By means of these taxes, externalities are internalized and both the consumer and the company reach the socially optimal solution in a decentralized way. The implementation of this mechanism in practice is materialized through a Coasian property rights approach where the parties involved reach the efficient solution by bargaining over welfare gains. The party installing the meter has to buy the “right to meter” from the metered party by fairly compensating him thus internalizing the externality and reaching the efficient outcome. To illustrate the incentives involved in metering water consumption, the rate structure and metering policies of two water concessions in Argentina are studied: Buenos Aires and Córdoba. Conclusions and policy recommendations are drawn from the theory and the two practical cases.

Suggested Citation

  • Andrés Chambouleyron, 2002. "An Incentive Mechanism for Decentralized Water Metering Decisions," Industrial Organization 0206001, University Library of Munich, Germany, revised 01 Nov 2002.
  • Handle: RePEc:wpa:wuwpio:0206001
    Note: Type of Document - Acrobat PDF; prepared on IBM PC - PC- TEX/UNIX Sparc TeX; to print on HP/PostScript/Franciscan monk; pages: 23 ; figures: included/request from author/draw your own

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    References listed on IDEAS

    1. J. Elnaboulsi, 2001. "Nonlinear Pricing and Capacity Planning for Water and Wastewater Services," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 15(1), pages 55-69, February.
    2. Jihad Elnaboulsi, 2001. "Nonlinear pricing and capacity planning for water and wastewater services," Post-Print hal-00447925, HAL.
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    Cited by:

    1. Andrés Chambouleyron, 2004. "Optimal Water Metering and Pricing," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 18(4), pages 305-319, August.
    2. Simon Cowan, 2006. "The welfare economics of optional water metering with asymmetric information," Economics Series Working Papers 273, University of Oxford, Department of Economics.
    3. H. Wang & Y. Dong & Y. Wang & Q. Liu, 2008. "Water Right Institution and Strategies of the Yellow River Valley," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 22(10), pages 1499-1519, October.

    More about this item


    water metering; water pricing; water rates;

    JEL classification:

    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities

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