How should urban water be priced? - An empirical analysis for the city of Mekelle, Ethiopia

Urban water utilities have focused on setting water prices to cover average costs, usually using increasing block rate designs. In an attempt to contribute to the use of efficient, equitable, and revenue-sufficient pricing, this paper estimates the long-run marginal and average social costs of water supply in Mekelle city using a multi-product translog cost function that incorporates the shadow price of natural water. Findings show that the marginal social costs of providing one m(3) of residential and non-residential water are Birr 5.33 and 7.71 (Birr = Ethiopian currency: 1 Euro approximate to 23 Birr), respectively, while the average current prices are Birr 4.46 and 6.10/m(3). On the other hand, the average social costs of residential and non-residential water are estimated at Birr 14.34 and 16.36/m(3), respectively, implying that marginal social cost-based prices would still lead to a revenue deficit of approximately Birr 9/m(3).