A Model for Constrained Optimum Water Pricing and Capacity Expansion

Previous studies of optimum water pricing and capacity expansion have ignored the political and administrative factors which limit the range of feasible decisions. A general model is presented for identifying the water price horizon so as to maximize the present value of net benefits. Constraints on the range of water price, the rate of price change, and financial cost recovery are included in the model. The model is applied to a hypothetical case study of an urban water supply system. The results indicate that optimum water pricing and capacity expansion policies are likely to achieve some increase in economic benefits when compared with average cost pricing. Administrative and political constraints tend to reduce these benefits but result in more acceptable pricing policies.