This article provides an overview of key economic concepts in water services with a focus on price-based strategies for demand management in the face of resource scarcity using the case of Nairobi city water services. The paper starts by first presenting key issues and concepts in water economics then looks into detail issues of water pricing and concludes by providing recommendations to the city utility on a novel approach for price-based demand management of scarce water resources. Three key messages emerge from this brief review. First is that water pricing has been used more as an instrument for achieving financial sustainability of the supplier rather than an economic allocation instrument. The message is that if the service provider is not able to maintain the system adequately because of charging the wrong price, the quality of services will deteriorate. Eventually the system collapses leaving people more vulnerable to water-related diseases. Second is that the quality of water governance depends on two factors-the public value that citizens place on water and what they are willing to pay for it and the quality of the relationship between citizens, the state and the managing entity of the service. The Third message is that contrary to conventional economic theory, an increase in price of water doesn’t always signal the consumer to reduce consumption and demand. Research shows that most urban households don’t know the price they pay for water since it makes a very small portion of their budget, so prices don’t affect them much especially when the billing structure is complicated and information not available to users. This calls for urban utilities to increase awareness on the value and cost of water through proper structuring and presentation of water bills to consumers.
Valuing water Economics of Water Demand Management