Replenishable but Depletable Resources: Water

You will never miss water, till your taps get dry.

Supply of water

Our renewable supply of water is controlled by the hydrologic cycle –only a fraction available for humans – of which 2.2% is freshwater – just 0.01% available for us Replace body fluids + food sources depend on it Current supply is 10 times more than consumption Surface water & ground water withdrawals: in US in 2000 – 262 b gallons per day – of which 83 b g from ground water Worldwide 1.5 b depend on groundwater for drinking supplies (2002) – agriculture largest consumer

Rain Clouds Rain Clouds formation Evaporation Vegetation Surface run-off Ground water Soil Ponds Deep Percolation Ocean

1.5 billion people depend on ground water Agriculture : largest consumer Water diversion is common (Tucson) but increasingly unavailable Quality of water – depletion & contamination is a problem – limits supply of potable water Excessive withdrawal from aquifers  sinking of land sudden Groundwater – bore wells – difficult to replenish Water shortage everywhere – Mexico city/India Is this allocation efficient?

Efficient allocation of Scarce Water

Efficiency depends on whether surface water & ground water is trapped?

Surface water: absence of storage –competing users - supply by nature - future generations not affected by withdrawal practices today Ground water: withdrawal now affects future – allocation over time is crucial

Surface Water: Efficient Allocation

Many uses / users – for efficient allocation: (1) Strike balance among a host of competing users (2) find an acceptable means of variable supply of surface water each year Supply not constant – changes in a year & year to year ∴ allocated in the fashion when MNB is equal for all users If MNB s are not equalised - transfer water from low MNB to high MNB

A & B: individual net benefit curves – Supply: S

o

water available OQ

T o S 1 S 0 Per unit A MNB 1 B MNB 0 Aggregate MNB

0

Q B 0 Q A 1 =Q T 2 Q A 0 Q T 0 Quantity of water

If supply of water changes to S 1 receives no water – A gets it all then B use Why is allocation so radically different between S 0 & S 1 ?

MNB curve of use A is above that of use B, shows that as supply falls the cost (forgone net benefits) of doing without water for A is higher than that of B To minimise the cost more burden is on B than on A Efficient allocation those who find substitutes or conserve receive smaller allocation as supply diminishes than those who have few alternatives

Groundwater

Depletable Withdrawals > recharge: resource will be mined until – • Supply gets exhausted or • MC of pumping additional water gets prohibitive Substitute to groundwater – proximity to surface water Price rises over time until the point of exhaustion or until marginal pumping cost gets prohibitive or MC of pumping = next least expensive source of water i.e. when MC of pumping = price If ground is porous groundwater withdrawals can affect surface water flows

The Current Allocation System

In US (& also in India) the means of allocating water differ from one geographic area to the other Property rights ‘Riparian rights’: right to use water to one staying adjacent to water Gold mining - demand for change in property rights structure - need for transferability Evolution in mining camps became the forerunner of ‘prior appropriate doctrine’.

Shifting of water to more useful uses - from surplus to deficit areas - Irrigation system by private companies - agriculture flourished Public ownership ‘usufructory rights’

State control on rates of water transfer by private companies Demand still high – profits high – large scale water diversion Federal role originated in 1800s – out of concern for country’s development & economic growth built network of inland waterways for transportation 1902: Reclamation Act: federal govt. built 700 dams to provide water & power to help settle the West Subsidy for water supply

Inefficiency

Current system not efficient - due to restrictions on water transfers - MNB should be equal in all uses – trading rights for water  efficiency Inefficiently low prices Allocation inefficient - transfers from agriculture to municipality are common as it raises the marginal benefit Subsidies - Rate structure & prices both are at fault Prices low as (i) historic ACs are used to determine rates (ii) marginal scarcity rent is rarely included Efficient pricing should use MC & not AC – water utilities are capital intensive with large fixed costs in SR

S-Run AC will be falling  MC falls below AC ∴ Mc pricing will not generate enough revenue to cover costs Low pricing & ignoring marginal scarcity rent will promote excessive demand for water 2001: conflict between off-stream & in-stream users Without formal recognition of in - stream flow rights, the value of species cannot be properly incorporated into allocation of decision

Common Property Problems

Open access resource – depleted too rapidly Users loose interest in conserving - marginal scarcity rent ignored In an efficient market incentive to conserve groundwater is created by the desire:  To prevent pumping costs from increasing too rapidly  To capitalise on increasing prices that would rise in future Conserver: no exclusive right to the water saved People on the periphery of aquifer would be hit 1 st – at center supply for longer time

• • • • • • For open – access resources economic theory suggests several direct consequences: Pumping cost rises rapidly – initially price low Too much consumption by early users Burden of this waste not shared uniformly Aquifer – bowl shaped – centre supply water for longer time Future users hit hard For coastal aquifers salt water intrusion is an additional cost

Potential remedies

Reforms to promote efficiency of water use, while keeping in mind interests of future generations Reduce number of restrictions on water transfers “use it or loose it” – extravagant use of water Pricing practices for irrigation water: Two part & volumetric pricing, output pricing, block rates, input pricing, area pricing Water: free good – charge only distribution cost scarcity value should be charged

Per Unit Cost

Various variable charges Uniform rate structure Declining block rate structure Inverted block rate structure

Usage Peak Non-peak

Seasonal peak rate structure

Role of Water & Politics – 1976: Tucson Privatisation of water supply – monopoly excessive rates – when rights allocated fairly & enforced consistently, privatisation of access rights can become beneficial for all users & not only to the rich Water scarcity is not merely a problem to be faced at some time in the distant future. In many parts of the world it is already a serious problem & unless preventive measures are taken it will get worse . The problem is not insoluble, though to date the steps necessary to solve it have not yet to been taken.

To sum up

Water scarcity is already a serious problem Current use of water exceeds replenishable supplies, implying that aquifers are being irreversibly drained.

Replenishable water should be allocated to equalise the MNB Ground water requires that the user cost of be considered Reforms are possible