Abstract:The objective of this study is to define an efficient pricing scheme for irrigation water in conditions of unmetered water use. The study is based on a principal-agent model and identifies a menu of contracts, defined as a set of payments and share of irrigated area, able to provide incentives for an efficient use of the resource by maximizing social welfare. The model is applied in the case study of the Çukas region (Albania) where irrigation water is not metered. The results demonstrate that using a menu of contracts makes it possible to define a second best solution that may improve the overall social welfare derived from irrigation water use compared with the existing pricing structure, though, in the specific case study, the improvement is small. Furthermore, the results also suggest that irrigation water pricing policy needs to take into account different farm types, and that appropriate contract-type pricing schemes have a potential role in providing incentives to farmers to make irrigation choices to the social optimum.

Most of the irrigated agricultural regions in Europe are supplied by surface irrigation networks managed by local water authorities (WAs). Under such conditions, WAs are not able to fully monitor water usage and farmers have an information advantage vis-a-vis the WA. This results in the water authority suffering 'pricing failure' if it decides to apply an incentive pricing strategy (tariffs proportional to the alleged water uses). Indeed, farmers could exploit their information advantage by behaving in an opportunistic manner, withdrawing more water than declared, and ultimately paying less than they should. This situation could also undermine the efficacy and the efficiency of the WA incentive pricing strategies. This paper analyses incentive water pricing schemes under asymmetric information by the means of a Principal-Agent model. The Agency problem between the WA and farmers is addressed by introducing a monitoring strategy that would enable the WA to detect farms action. In doing so, we compare incentive strategies with flat rate water pricing and investigate under what conditions the WA might provide/not provide incentive water pricing in the absence of water metering.

Water pricing policy for irrigated agriculture is considered as a key issue in the Water Framework Directive (WFD) implementation. The main obstacle is that a large part of the water used in agriculture is unmetered. The objective of this study is to assess the Water Authorities (WA)’s choices between different options of incentive pricing policies (IPP) and to evaluate their economic performance compared with flat rate (FR) solutions. The applied method relies on a principal-agent model under adverse selection, in which WAs are less informed than farmers about the water use costs and profits. In this respect, the paper provides a theoretical interpretation of how different information conditions, profit and cost structures contribute to affecting WAs’ pricing strategies and their ability to deal with some of the WFD principles. The study shows that, in the absence of water metering, WAs can still set up incentive pricing strategies by formulating menus of contracts that are more efficient than flat rate payments. Also, we show that, at least for cases in which there is only a small differentiation in water costs among farmers or no transaction costs, the first-best solution (the solution that yields the highest return from the use of the resource) can also be optimal under asymmetric information. The main policy recommendation is that, in the absence of water metering, a wider set of incentive pricing options should be considered, the performance of which, however, should be evaluated based on the specificities of each irrigated region.

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