Chapter 13. The Economics of Water

1. 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

2. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

22. 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

23. 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

24. 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.

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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”

32. 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