Transcript INTRODUCTION - Western Kentucky University

The Economics of
Water Utilization
Tools and Applications
Presented by Matt Bogard, M.S. Agricultural
Economics
MANAGING RESOURCES

Women and children in some countries spend
up to 6hrs/day obtaining water
 ~10 million person years ( Sustainable
Development Network)
 2.7 billion expected to experience shortage by
2025 (U.N.-water)
 1.1 billion currently without access to safe water
(U.N.-water)
ECONOMICS
 Given
worldwide problems of water
pollution, sanitation, and access- how can
knowledge of economics help?
 Economics: How our wants and needs
are made compatible, given constraints
and decision making mechanisms of
society.
THE GENERAL FRAMEWORK
 MARKET
EQUILIBRIUM
 THE ROLE OF INSTITUTIONS
 DEPARTURE FROM EQUILIBRIUM
 EXTERNALITIES
BALANCING COSTS AND BENEFITS:
MARKET EQUILIBRIUM*
INSTITUTIONS
 Shortage
of supply vs. adequate
institutions that effectively and efficiently
allocate water
 “Water markets can provide appropriate
incentives to improve efficiency of water
use.” World Bank Research Observer,
1999)
 Institutions matter- Booshire et al-(2004),
Hadjigeorgalis and Lillywhite(2004)
PROPERTY RIGHTS SYSTEMS
 Riparian
Rights
 Prior Appropriation
AGRICULTURAL MARKETS
•
•
•
Those with a senior rights have less incentive to
conserve and invest in more efficient irrigation tech.
Under investment in conservation vs. over investment
in irrigation technology
Surplus could be transferred
EXAMPLES:
Unequal sharing of risk (Burness and
Quirk, 1979)
 Water transfer: TX- 99% traded water
rights results in a transfer from agriculture
to urban use ( Griffin, 1998)

INSTITUTIONS:
Impact of institutions on the divergence between
capitalization of lease values and land prices(Hansen and Williams 2005)



PV (Lease) = P(land)
Divergence
Econometric model- institutional variables were
significant in explaining transactions using data
from water trades recorded in the Water
Strategist
SHORTAGES:Urban Markets
 Physical
Supply may be irrelevant
 Cambodia, Rwanda, Haiti <50% have
access to safe water > rainfall than
Australia
 Cherrapuji India- numerous shortages
SHORTAGES: Urban Markets

97% of all water distribution in poor countries is
managed by public suppliers (Segerfeldt, 2004)
 ‘The legacy of public funded water services in
excessive quantities to the few at subsidized
prices has created inefficient conditions
resulting in severe environmental impacts on the
resource itself’- UN World Water Development
Report
SHORTAGE: Supplier Behavior



DECREASED INCENTIVES
FOR
EXPANSION/MAINTENANCE
P’ DOES NOT COVER
COSTS
WASTE: 32/50 ASIAN
COUNTRIES >30%
SPILLAGE (WHO)
SHORTAGE: Demand Behavior

URBAN DWELLORS:
With P’, do not
conserve water
 RURAL DWELLORS:
not connected to
main, seek less
sanitary and often
more expensive
options
PRICE DISTORTIONS*
Water Pollution:
Water Pollution:*
Water Pollution: *
The Coase Theorem
(JLE, 1960)
 External
costs are a problem of barriers to
entry and attenuation of property rights
that prevent a bargaining solution
Property Right Assignments 3rd
parties could bargain with polluters
 With
The Coase Theorem

Suppliers would face
opportunity costs
equal to the value of
effects on 3rd parties:
(e)
 Consmers would
have to pay a price
that reflects these
costs
The Coase Theorem


Suppliers would face
opportunity costs equal to
the value of effects on 3rd
parties: ‘e’
MCp(l,k,e) = MCs(l,k,e)
Solutions in Practice: Pollution
Control
 October
2006: Water Quality Credits
Implemented
 Los Angeles: Salt Water Intrusion
(Blomquist, 1995)
 Technological Change
Solutions in Practice: Improved
Market Performance
 La
Serena, Chile- obviated dam
construction project ( Hearne and Easter,
1997)
  28% increase in supply
 Gunjarat, India- privately developed
pipelines for irrigation (Shah, 1993)
  farmers have choice of 4 pipelines
Are Market Prices Affordable:
Mains vs. Alternative Sources
(Adapted from Moor, 1997)
COUNTRY
CITY
Nigeria
Lagos
X TIMES MORE
COSTLY
4-10x
Pakistan
Krachi
28-33x
Indonesia
Jakarta
4-60x
Bangledesh Dacca
12-25x
Peru
17x
Lima
Issues and Challenges:
Market Based Solutions
 Transaction
Costs
 Technological Barriers
 Infrastructure
 Political Concerns
Issues and Challenges:
Regulatory Solutions
 Incentives
 Lack
of precision and fine tuning
 Information
REFERENCES









Bloomquist, William. “Institutions for Managing Groundwater Basins in Southern California.” In Ariel Dinar and
Edna T. Leichman.
Carlson, Gerald A.; Zilberman, David; and John A. Miranowski. “Agricultural and Environmental Resource
Economics.” Ch. 8. Oxford University Press. New York NY. 1993
Coase, R.H. “The Problem of Social Cost.”Journal of Law and Economics, Vol. 3, Oct., 1960 (Oct., 1960), pp. 1-44
Dinar, Ariel and Edna T. Leichman, eds. Water Quantity/Quality Management and Conflict Resolution:Institutions
Processes, and Economic Analysis. Westport, CT: Praeger Publications
Easter, William K.; Rosegrant, Mark W.; and Ariel Dinar. “Formal and Informal Markets for Water: Institutions,
Performance, and Constraints.” The World Bank Research Observer, vol. 14, No 1 (February 1999), pp.99-116.
Hansen, Kristiana; Howitt, Richard; and Jeffrey Williams. “An Econometric Test of the Endogeneity of Institutions:
Water Markets in the Western United States.” Department of Agricultural and Resource Economics. University of
California, Davis. Presented at the American Agricultural Economics Association Annual Meeting Providenc,
Rhode Island, July 24-2.
Hearne, Robert R. and K.William Easter. “The Economic and Financial Gains of Water Markets in Chile.”
Agricultrual Economics. 15:187-99.
Moor, Andre’ P.G. de. Perverse Incentives: Subsidies and sustainable development: Key issues and reform
strategies. Haag, Netherlands: Institute for Research on Public Expenditure/San Jose’, Costa Rica, Earth Council
1997. www.ecouncil.ac.cr/rio/focus/report/english/subsidies
Segerfeldt, Fredrik. “Water for Sale: How Business and the Market Can Resolve the World’s Water Crisis.” Cato
Institute. Washington D.C.