countries. Despite a fame of vicious, the economic efficiency criterion is attractive to most
economists. Much of the literature has focused on the belief that resource allocation efficiency is
achieved by equating cross sector marginal benefits (Dinar, Rosegrant, and Meinzen-Dick). The
literature has covered the following water pricing methods (Tsur and Dinar, 1995): volumetric
pricing, output pricing, area pricing, tiered pricing, two-part tariff pricing, and market pricing.
Tsur and Dinar (1995, 1997) and Johansson examined in great detail the various pricing options
available, and the contributions of these options to the goal of achieving economic efficiency of
water use. Water pricing method in this paper, however, refers to volumetric pricing mechanisms
that charge for irrigation water based on consumed quantities.
Some district analyses have demonstrated that similar pricing policies may have very
different impacts under different conditions (Tsur et al.), as reflected in the shape (elasticity) of
the derived demand curves. Farms with steep (inelastic) demand curves will be less responsive to
price increases. However, when policy makers or project designers do not have a clear
understanding or information of the shape of demand and supply curves, it will be difficult to
find the most sensible price that will optimize water use. Tsur and Dinar (1995) found that water
use is most efficient when pricing, such as Marginal Cost Pricing (MCP), affects water demand.
However, the main drawback of MCP is the difficulty of including all marginal costs and
benefits when determining the correct price to charge. Furthermore, as Perry (2001) indicates, a
high marginal cost for water can reduce demand effectively, but is unlikely to be accepted within
the politically feasible range. The limited acceptable range of pricing has weakened water pricing
effectiveness as a policy option. As a result, most pricing reforms have only produced
suboptimal solutions instead of first-best solutions (Dinar).