An incentive mechanism for improving urban water supply system

An essential challenge for many developing countries is improvement of water supply system to ensure urban water supply safety and reliability. Penalty, subsidy and water price increase are often considered as the main incentive measures for improving urban water supply system. However, the implementation of these policies is confronting some uncertainties because of the conflicts of involved actors. In order to find the most effective incentive mechanism for improving urban water supply system, this study conducts a game theoretical analysis to analyze the conflicts of interests between municipal government and a water company. The effects of penalty, subsidy and water price increase on behaviors of key stakeholders were obtained. The main findings are that water price and penalty are the effective tools to promote urban water supply system improvement, while subsidy policy is not useful. The conclusion has important policy implication for improving urban water supply system safety. Key-Words: Water supply system, incentive mechanism, equipment upgrade, China