# **I.  Introduction**

With an increase in population and a decrease in available freshwater resources, water scarcity has become a more and more pressing issue worldwide. According to Nature (2008), over a billion people around the world lack access to safe drinking water and over two billion have little or no sanitation. UNEP (2000) predicts that by 2025, two-thirds of the world’s population will live in water-stressed regions with per capita water less than 1,700 m<sup>3</sup> per year. Although domestic water use is not a major part of water consumption in the world today, it plays a crucial role in people’s daily life, and it is directly related to social welfare and public health issues. Therefore, the efficient use of limited domestic water resources is one of the central concerns of policy makers.

Water pricing is an effective mechanism to manage water use. Switching to a more appropriate price scheme can adjust inefficient levels of domestic water use by changing household water demand. However, water pricing has been a difficult issue for both governmental and nongovernmental decision makers. Developing countries, which usually suffer from inadequate water supply facilities and lack sophisticated and comprehensive water pricing systems, are in need of more practical and effective water pricing methods.<sup>2</sup> Due to both their complexity and importance, methodologies for water pricing have been widely studied. Water price-makers usually apply one or both of the following strategies to decide domestic water price levels: (1) supply-side based strategies, and/or (2) demand-side based strategies. The supply-side based strategies primarily focus on costrevenue efficiency, while the demand-side based strategies principally focus on affordability for users and social equity. OECD (2003a) discussed nine categories of pricing strategies according to the forms and underlying considerations of water tariffs: (1) no water charge, (2) fixed water fee, (3) flat uniform water rate, (4) decreasing block rate, (5) increasing block rate, (6) average cost pricing, (7) marginal cost pricing, (8) two-part tariff, and (9) peak load or seasonal pricing.

Affordability is an essential concern in water pricing decision making by a government. Affordability, measured by the ratio of a household’s water expenditures to its income, has to be taken into consideration in determining price levels to ensure that the fundamental water needs of the poor can be met. Studies suggest that water consumption expenditures should not exceed a “burden-threshold” of the household’s total income (OECD 2003a). In general, as long as the cost of potable water to a household does not exceed 5 percent of the household’s total expenditure, the water price is considered “affordable” (Fankhauser and Tepic 2007).

However, the burden threshold may be different for different countries or regions, as well as for different groups of households, depending on factors such as the scarcity of water, tradition, and household income. For policy makers, an assessment of the acceptability of a price by households is as important as an affordability assessment.

2 In most of the developed countries, water pricing is still an issue of great concern (Garcia 2004).