Optimal water usage and pricing programs discussed in literature tend to take for granted the users’ willing to pay higher efficiency prices in order to obtain the resulting benefits. Yet proposals for marginal cost water pricing on Oahu have often been found to be politically infeasible because current users will have to pay a higher price even though future users will be better off. We show how efficiency pricing can be rendered Pareto-improving, and thus politically feasible, by compensating the users suffering a loss due to higher prices.
