Enhancing efficiency of Water Supply — Product Market Competition versus Trade
The existing organisation of piped water supply in Europe is very heterogeneous. In most countries, water supply is organised on a local level. Historically, the communities are responsible for water supply systems such as treatment and storage facilities or pipe networks since water supply is widely seen as a natural monopoly. In addition, local authorities choose the form of organisation and the permitted degree of private sector participation. Due to these decentralised structures, water supply in most European countries is characterised by a high number of locally operating monopolies.27 Such local operators often face very different marginal production costs due to differences in production scales and the use of different raw water resources, as for instance surface, ground or spring water (see e.g. Correia and Kraemer 1997). As a result, retail prices vary significantly — even between neighbouring water utilities. The obvious question is how to overcome this puzzling inefficiency. Countries as England and Wales or France introduced a process of privatisation in the water industry. However, as Feigenbaum and Teeples (1983) showed, different ownership structures do not explain efficiency differentials in communal water supply. That means, the pure changing of ownership structures does not necessarily enhance the efficiency of water supply. Rather such process has to be combined with further measures. Prima facie, there are three ways to improve productive efficiency: concentration, competition or increased trade (see also Ludin et. al., p. 3). In fact, there has been a progressive concentration process in countries such as Belgium or the Netherlands.28 However, in most other countries concentration is not a feasible opportunity, due to political, legal or geographical restrictions.
KeywordsMarginal Cost Retail Price Retail Prex Product Market Competition Trade Regime
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