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

The 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

– These are needed to promote industry and development

– Water is subsidized in the West to promote development

– TVA developed the dams in Tennessee for development

• 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

• A public good or shared resource– One that the general public benefits from, but this use

does not interfere with or diminish the use by others

– Examples: air, water recreation, national defense

• A private good or commodity – One that can not be shared with others

– Examples: milk, gas

Public vs. Private Use

• Public Uses:– Uses of water that benefit the general public

– Examples: fountains, rivers, lakes

• Private Uses:– Uses that benefit individuals

– Examples: agriculture, industries, water mill

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

Privatization

• The delegation of water management to the private sector– Private water utilities that manage water and

wastewater– Water marketing - used to transfer water

between sectors

Privatization

• Private companies provide 15% of US water services • In 1999, Atlanta decided to privatize city’s water

system• United Water, a subsidiary of Suez (French

company) received a 20-year lease• Responsible for

– 1 drinking water treatment plant

– 3 wastewater treatment plants

– Water distribution system, maintenance, and billing

Privatization

• United Water would recieve $21.4 million in annual revenue

• Projected savings to Atlanta over 20-year lease was $400 million

• January 2003, Atlanta withdrew lease– Higher than expected operation & maintenance costs

– Poor water service

– 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 do not have access to safe drinking water

• Average cost of water in US is 0.5% of income– Since price is fixed, for low-income people it is a higher

% of income

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

Water Affordability

• Average residential water use in US– Toilets 36%

– Bath and shower 28%

– Washing machine 20%

– Outdoor use 16%

• Some water agencies have increased cost to residential users to reduce consumption

• States (including GA) have passed laws to 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

• In the US 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

Water Marketing

• Unregulated water markets– Farmer sells his water to city

• Farmer makes a lot of money

• City builds a lot of homes

– The local economy goes broke• The county where the farmer sold his water loses the taxes the

farmer paid

• The local businesses that depended on the fertilizer, feed, seed, farm equipment loses his business

• These are indirect impacts

Water Marketing

• Regulated water markets– Water transfers restricted to county of origin

– Water transfers restricted to type of use• i.e., Ag to Ag, City to City, Industry to Industry

– Non-local water transfers must be approved by the local county of origin

Water Marketing Australia

• Murray-Darling Basin– Australia’s largest river system

– 19 inches annual rainfall

– 50% of Australia’s cropland

– 75% of Australia’s irrigated land

– 10% of population

– 3 states: New South Wales, Queensland, & Victoria

• Murray-Darling Basin Commission established in 1917 to manage water

Water Marketing Australia

• Until 1980’s water use for irrigation was unlimited– Shortages, low river flow, and salination of soils

became a problem

• 1981 limits were imposed and trading was allowed– By mid-1990’s water was 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 tax.

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

• 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)• If a point source is exceeding the cap they have 2

choices:– Install advanced technology to remove pollutants

– Buy credits from point source that has credits to sell

Pollutant Trading

• Price is determined by buyer and seller• Trades are restricted to watershed• Free market determines the most efficient way in

terms of cost to reduce total pollutant load in watershed

• Trades between point sources are common• Trades between point sources (buyers) and

nonpoint sources (sellers) less common due to uncertainty in nonpoint source controls

Pollutant Trading

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

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

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 is the economic value of improved water quality or leaving more water in streams to support wildlife?– Difficult question for economists– Use studies that measure “willingness to pay”– What is the value of “ecosystem services”

Summary

• The value of water increases as it becomes more scarce

• Two views of water: a public resource or a private good

• Water markets have been used to allocate water• Assigning an economic value to environmental

value of water is difficult