Water Authorities’ Pricing Strategies to Recover Supply Costs in the Absence of Water Metering for Irrigated Agriculture

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.