Kala Paani - the black market for water!

This is the classic public policy problem. The government can supply only so much water and is probably inefficient at it. Demand is soaring. The informal sector steps in to supply it. Their mechanism is through the "illegal" pumping of water from underground, and distributing it through water tankers. My bet is that it is a common sight in all major metro cities, especially in the urban slums. The government does not dare take any serious steps for it does not have a alternative solution. And the usual corruption factor. Read the tanker economy for knowing more about the economics of the informal water market in Mumbai.

Well, we have a "market" for the informal supply of water. And in time, private constituencies will build up around this lucrative business and it will become doubly difficult for the government to break the forming nexus. That is if you have decided whether or not to stall it! Unfortunately, it does not satisfy the criteria for a market. Apart from the "information of quality" the problem is that property rights are not clearly defined. So there is a danger that the water underground may be withdrawn beyond the normal rate of replenishment. And lead to rampant exploitation of the resource. Again, the informal water companies are not factoring in the true price of water because it is mostly free for them, apart from the extraction, labour and transport expenses. Having the government as a property-right holder does not create the right incentives to cater to a growing market. Hence if the "water mafia" withdraw water without any incentives to think for its replacement, then we have another looming problem on our hands.

How can we design the appropriate framework for this situation?