JEL Classification: L95, Q25.This paper surveys water pricing models, highlighting some important results. Efficiency
requires marginal cost pricing. Intra-annual price changes or customer differentiation to
reflect differences in marginal costs can enhance efficiency. A marginal cost pricing
mechanism may signal the value that consumers attribute to further capacity expansions
as the water supply system approaches its capacity limit and marginal cost rises.
However, pure marginal cost pricing may not be feasible while respecting a revenue
requirement because marginal costs may be higher or lower than average costs. The most
common ways of combining efficiency and revenue requirements are through the use of
two-part tariffs, adjusting the fixed charge to meet the revenue requirement, or through
second-best pricing like Ramsey pricing. It is not evident whether the best scheme is a
two-part tariff or some other pricing mechanism. The role of block rate pricing,
increasingly more frequent in actual pricing practices, is yet to be fully investigated
