1. Economic and Financial Instruments for IWRM Application of economic instruments

6. Technical efficiency water production a b c c>a>b Production fn.

7. Allocative efficiency in a water system with two activities P2*z2´(y2) The allocative efficient point is y** in which marginal product of both activities are equal. In y*, too much water is assigned to the low value Z 2 activity, and “society” can gain from reallocating water from Z 2 to Z 1 (you can understand this intuitively looking at the marginal product of Z 2 in the diagram, if you allocate more water than y** to Z 2 , any additional unit of water produces less income than allocating that unit to Z 1 , and viceversa, thus the maximum efficiency occurs in y**).

10. Example: Use of economic tools for dealing with environmental externalities: groundwater or pollution taxes Cost with externality Private cost demand quantity Cost of extraction With extraction tax No tax

13. Types of water tariffs:

14. Water tariffs, taxes and subsidies