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7 Water Pricing
7.7.1 Nature of Water and Its Services
There is now consensus at the international level that water is scarce and needs to
be treated as an economic good. Allocating water as a pure economic good is more
complicated than for other goods and services, mainly due to water’s status as a public
good and the externalities associated with it. Whatever good is selected, the dilemma
is whether to pay resources value, environmental damage, and service costs by user
or to face unsustainable financial operation, resources development, and environmental degradation of the system. Treating water as a social good inevitably generates economic and environmental problems, whereas treating water as an economic
good results in social problems.
China has suffered from the unclear/mixed definitions and frequent changes,
particularly due to rapid social and economic transition. The water sector was pushed
to increase efficiency and seek economic benefits in the 1980s, but returned to its
position as a crucial industry through industrialization in the 1990s, and then played
a strategic and fundamental role in society and the ecosystem in the 2000s. After
2010, it has been influenced by public interest, but with the market playing a decisive
role. Therefore, over a period of more than 30 years, the water sector began as an
economic good, transitioned to an environmental good, then a social good, and now
appears to be returning to the status of an economic good.
However, water pricing reform has not followed the same path. While the resources
charge and the environmental charge were introduced in the 1980s, considered
as an economic instrument, water pricing consistently targets economic goods,
for instance, to recover costs or reflect water shortages or environmental costs.
Conversely, the practical pricing regulation has followed the social target, impacted
by economic development and social stability concerns. This mismatch between
objectives undermines the effectiveness of pricing tools in China.
7.7.2 Cost Recovery
In theory, cost recovery is the basic principle for pricing and the basis for the economic
good. However, over 30 years of reform history indicates that costs could not be
compensated for by tariffs in the water sector in China. This outcome raises the
question of whether it is appropriate to identify cost recovery as the key principle for
tariff reform? Alternatively, could the public sector with a natural monopoly achieve
cost recovery? Or, considered from another perspective, is the cost too high to ensure
such recovery?
In China, full cost recovery is raised as a principle. However, under the current
“cost plus profit” pricing regulation methods and ineffective regulatory practice,
the tariff could never cover the costs due to information asymmetry. This problem
indicates the need to reform the regulatory system. An incentive-based regulatory
system would probably be a feasible option.
7 Water Pricing
7.7.1 Nature of Water and Its Services
There is now consensus at the international level that water is scarce and needs to
be treated as an economic good. Allocating water as a pure economic good is more
complicated than for other goods and services, mainly due to water’s status as a public
good and the externalities associated with it. Whatever good is selected, the dilemma
is whether to pay resources value, environmental damage, and service costs by user
or to face unsustainable financial operation, resources development, and environmental degradation of the system. Treating water as a social good inevitably generates economic and environmental problems, whereas treating water as an economic
good results in social problems.
China has suffered from the unclear/mixed definitions and frequent changes,
particularly due to rapid social and economic transition. The water sector was pushed
to increase efficiency and seek economic benefits in the 1980s, but returned to its
position as a crucial industry through industrialization in the 1990s, and then played
a strategic and fundamental role in society and the ecosystem in the 2000s. After
2010, it has been influenced by public interest, but with the market playing a decisive
role. Therefore, over a period of more than 30 years, the water sector began as an
economic good, transitioned to an environmental good, then a social good, and now
appears to be returning to the status of an economic good.
However, water pricing reform has not followed the same path. While the resources
charge and the environmental charge were introduced in the 1980s, considered
as an economic instrument, water pricing consistently targets economic goods,
for instance, to recover costs or reflect water shortages or environmental costs.
Conversely, the practical pricing regulation has followed the social target, impacted
by economic development and social stability concerns. This mismatch between
objectives undermines the effectiveness of pricing tools in China.
7.7.2 Cost Recovery
In theory, cost recovery is the basic principle for pricing and the basis for the economic
good. However, over 30 years of reform history indicates that costs could not be
compensated for by tariffs in the water sector in China. This outcome raises the
question of whether it is appropriate to identify cost recovery as the key principle for
tariff reform? Alternatively, could the public sector with a natural monopoly achieve
cost recovery? Or, considered from another perspective, is the cost too high to ensure
such recovery?
In China, full cost recovery is raised as a principle. However, under the current
“cost plus profit” pricing regulation methods and ineffective regulatory practice,
the tariff could never cover the costs due to information asymmetry. This problem
indicates the need to reform the regulatory system. An incentive-based regulatory
system would probably be a feasible option.