Marginal Opportunity Cost Pricing for Municipal Water Supply

This paper describes the general rationale for marginal opportunity cost (MOC) pricing, illustrating the concept with special reference to municipal water supply. The various elements of MOC for water, namely marginal production or private cost (MPC); marginal user or depletion cost (MUC); and marginal environmental or external cost (MEC) are described and some numerical examples provided. The relevance of border prices in determining the MOC of tradeable commodities is also considered. The paper then reviews some of the key issues involved in actual implementation of MOC pricing. These include the treatment of externalities, measurement, financial and fiscal, income distributional and second best matters. The paper concludes by listing some possible research topics relating to MOC pricing. While the focus of the paper is on estimation and implementation of MOC as applied to municipal water supply, the approach and techniques employed are of general relevance. Other resources, such as coal and forests are referred to when they provide better illustration of some of the generic issues covered in the paper.

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Economy and Environment Program for Southeast Asia