Chapter 13. The Economics of Water

• The Value of Water• Water as a Public versus a Private Good• Water Affordability• Water Marketing• Water Banking• Pollution Fees and Credits• Environmental Values

Value of Water• A resource is cheap when it is

plentiful:– The price goes up as it becomes scarce– This is a scarcity value– The water-diamond paradox

• As the price goes up, we begin to substitute:– one product for another – one location for another

• We can also become more efficient

Role of Governments

• As water provider:– Many utilities are started for the purpose of providing water and

wastewater services

– Needed to promote industry and development• Large reservoirs in the West as well as TVA in the Southeast

• As water regulator:– Must allocate based on efficient and equitable uses

– Must protect the environment

Chapter 13. The Economics of Water

• The Value of Water• Water as a Public versus a Private Good• Water Affordability• Water Marketing• Water Banking• Pollution Fees and Credits• Environmental Values

Public vs. Private Good

– Public: A shared resource that the general public directly benefits from, but does not interfere with or diminish the use by others (air, water recreation, national defense)

– Private: A commodity that can’t be shared with others (milk, gas)

Public vs. Private Use

– Public: Use by the general public (fountains, rivers, lakes)

– Private: Use by individuals (agriculture, industry, water mill)

Privatization• The delegation of water management to the private sector

– Private utilities provide 15% of US water and wastewater services

• In 1999, Atlanta decided to privatize their water system– United Water, a subsidiary of Suez (French company) received a

20-year lease in operate a drinking water plant, three wastewater plants, their water distribution system, as well as operation and maintenance (O&M)

– United Water received $21.4 million per year, and was projected to save Atlanta $400 million during the 20-year lease

• January 2003, Atlanta withdrew the lease– Higher than expected O&M costs– Poor water service and water quality problems

Chapter 13. The Economics of Water

• The Value of Water• Water as a Public versus a Private Good• Water Affordability• Water Marketing• Water Banking• Pollution Fees and Credits• Environmental Values

Water Affordability• 1.1 billion (out of world population of almost 7 billion) people don’t

have access to safe drinking water• Even more don’t have access to wastewater systems• Average cost of water in US is small (0.5% of income)

– But this is harder for low-income people

• In 1990s, France passed laws to guarantee access to water– Can’t cut off water to homes with children or elderly

• Average residential water use in the US– Toilets => 36% Bath & shower => 28%– Outdoor => 16% Laundry => 20%

• Some water agencies use price incentives to reduce water use• Many states (including GA) require low-flow toilets in new homes

Chapter 13. The Economics of Water

• The Value of Water• Water as a Public versus a Private Good• Water Affordability• Water Marketing• Water Banking• Pollution Fees and Credits• Environmental Values

Water Marketing

• According to most economists, letting the market put a price on water is a way to ensure it is used efficiently

• Water marketing is common in Western states– Between individual irrigators

– Between irrigators and cities

– Between irrigators and industry

• Conflict between desire to use local resource for economic benefit and concept that water is a public resource

Unregulated water markets• Example: Farmers sell their water to cities

– Direct impacts: Farmers makes a lot of money, cities builds a lots of new homes

– Indirect impacts: The local economies go broke • Local counties lose taxes that farmers paid• Local businesses lose sales (fertilizer, feed, seed, farm

equipment)

Regulated water markets• Water transfers restricted to local region • Water transfers restricted to type of use

– Ag => Ag, City => City, Industry => Industry

• Non-local water transfers must be approved by the local region

Murray-Darling Basin• Australia’s largest river system

– 19 inches (500 mm) annual rainfall– 50% of Australia’s cropland– 75% of Australia’s irrigated land– 10% of population– Three states: New South Wales, Queensland, & Victoria

• 1917 => Water management agency adopted– Murray-Darling Basin Commission– Unlimited water use for irrigation

• 1980s => shortages, low flows, soil salinization• 1981 => limits imposed and trading was allowed• 1990s => water selling for $86 per acre-foot per year

Chapter 13. The Economics of Water

• The Value of Water• Water as a Public versus a Private Good• Water Affordability• Water Marketing• Water Banking• Pollution Fees and Credits• Environmental Values

Water Banking• The state buys and sells water resources

– Takes surplus and/or unneeded water– Stores it and then sells it to users

• Lakes for surface water, aquifers for ground water

– Can also require that a certain percentage (say 10%) of every private water transfer goes into the bank - a transfer fee.

Chapter 13. The Economics of Water

• The Value of Water• Water as a Public versus a Private Good• Water Affordability• Water Marketing

– Surface water marketing– Ground water marketing

• Water Banking• Pollution Fees and Credits• Environmental Values

Pollutant Trading• An example is Cap and Trade

– A cap is placed on how much point sources can emit (lbs of phosphorus per year, for example)

– If a point source is emitting less than cap then they can sell excess credits (in lbs of phosphorus)

• Trading system in the Tar-Pamlico River, North Carolina– Nitrogen and phosphorus credits– Mostly point source trades

• Trading system in the Murray-Darling basin– Salinity credits

If a point source exceeds their cap they can:• Install advanced technology to remove pollutants

– Very expensive– Limited reduction in pollution– Much cheaper to reduce nonpoint sources or trade

• Buy credits from point source that has credits to sell – Price is determined by buyer and seller– Trades are restricted to watershed– Free market determines the most efficient way to reduce total

watershed pollution– Trades between point sources are common– Trades between point sources (buyers) and nonpoint sources

(sellers) less common due to uncertainty in nonpoint source control

Chapter 13. The Economics of Water

• The Value of Water• Water as a Public versus a Private Good• Water Affordability• Water Marketing

– Surface water marketing– Ground water marketing

• Water Banking• Pollution Fees and Credits• Environmental Values

Environmental Values• What are the economic values of improved water quality or

leaving more water in streams to support wildlife?– Difficult question for economists...

• Use studies to measure the public’s willingness to pay• What are the values of ecosystem services?

Chapter Summary• The value of water increases as it becomes more scarce• Two views of water: a public resource or a private good• Regulated water markets are being used to re-allocate water

between users. Regulations are needed to ensure efficiency and equity.

• Assigning an economic value to water’s environmental benefits is difficult