Microeconomic Aspects Of Water Prices

Water as a specific commodity, and water supply as a specific industry, represent a very interesting field for microeconomic analysis. Starting from the fact that in the market economy most of microeconomic categories and relations are turning around the price, this paper is attempting to give a comprehensive analysis of key microeconomic determinants of water prices. Establishing that the water market is a monopolistic one, relations between supply and demand have been analyzed, as well as demand elasticity, relations between water supplier revenue and water price, importance and behavior of costs in water supply industry, relations between revenue, costs and profit of water supplier, relation between water supplier’s business results and quantity of water produced/sold, foundations and models of price discrimination, relations between capacities, supply and demand, and peculiarities of the behavior of basic microeconomic parameters in the short run. The conclusions of this paper are that monopolistic situation in the water supply industry brings positive effects by limiting irrational and ecologically unacceptable growth of consumption, while, in the other hand, it requires some kind of external control or even intervention in order to protect consumers from monopolistic rise of prices and limitation of access for marginal consumers. However, that external regulation should not be such to endanger economic rationality of business making of the water supplier, because that could jeopardize stability and quality of water supply itself.