Water has been heavily subsidized in Israel for many years and this policy has resulted in severe wastage of water. Drought, the peace process and the rapid, increase of urban demand has enforced the need for reform in the allocation and pricing of water. Water markets have been suggested in the past, as an efficient mechanism for the allocation of water, despite the lack of empirical evidence to support this claim. National ownership of land and water, as well as the nature of the settlement process in Israel, prevented the creation of Israeli water markets. The privatization of the Israeli water economy has been introduced through quasi-market mechanisms at both the regional and the national level. At the national level, a Hicksian type barter market is practised with given shares of the "initial endowments" while the aggregate water quantity is determined administratively by the central government. At the regional level, a "passive" water trading mechanism is introduced where at a price announced by the policy maker, each individual uses water according to his demand curve and pays a fine or receives monetary compensation according to his share in the aggregate water right. Regulation of a private firm which supplies water at the regional level, is conducted through monitoring the optimal ratio of conjunctive use of surface and underground water. Finally the efficiency of the current tiered pricing policy vs. the reform, is tested, using empirical data from several regions in Israel.


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