Transcript www.tceq.state.tx.us

The Economics of
Water for Environmental Flows
Mitchell Mathis
Houston Advanced Research Center
Presentation for the Science Advisory Committee
to the
Study Commission on Water for Environmental Flows
June 18, 2004
Overview
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What is economics?
What is economic value?
Economics and water
Economic value of environmental flows
Economics and the allocation of water for
environmental flows
What is Economics?
What is Economics?
What is Economics?

The study of scarcity, choices, and tradeoffs?

The study of production and consumption?

The study of markets?

The study of how to use resources in a way that
produces the most benefits?

The study of human welfare?
What is Economics?
Macroeconomics
The economy as a
whole
Unemployment
Inflation
GNP
Interest rates
Microeconomics
Markets
Individual
economic behavior
Consumers
Firms
Federal
Reserve
What is Economics?

Positive: “What is”

Normative: “What should be”
Objective: Utilize resources in a way that
maximizes benefits
“Efficiency”
What is economic value?
$
Marginal Costs
(Supply)
Consumer
Surplus
Price*
Producer
Surplus
Marginal Benefits
(Demand)
Quantity*
Quantity
Economics and Water
Humans
Municipal Agricultural

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Water
Industrial
Water users
Water demand
Water supply
Allocation across competing uses
The importance of economic value
Ecosystem
The Cost of Water
marginal
benefits
(demand)
marginal
cost
with infrastructure subsidy
with infrastructure subsidy
and no charge for raw water
subsidy
=> Price paid for water rarely reflects scarcity,
economic value
Water Demand
$
$
Q
Municipal
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

$
$
Q
Agricultural
Q
Industrial
Q
Environmental
Relates quantity demanded to price paid
Demand reflects willingness to pay/marginal benefits (a source of
economic value)
For many water uses marginal benefits (demand) are not well
understood, especially environmental uses
Water Demand
$
$
$
Q
Q
Municipal
Total
Demand
$
Agricultural
Q
Industrial
Q
Environmental
$
supply
Without demand for
environmental flows
Q
Decision-Making: Optimal Allocation
$
$
$
Q
Municipal
$
Q
Agricultural
Q
Industrial
Q
Environmental
Environmental
Industrial
Industrial
Optimal
Maximizes
total benefits
Agricultural
Municipal
Agricultural
Sub-Optimal
Municipal
Does NOT
maximize total
benefits
Decision-Making:
Weighing Cost and Benefits
Net Benefits = Benefits - Costs
Environmental
Flows
Decision-Making:
Weighing Cost and Benefits
Net Benefits = Benefits - Costs
Environmental
Flows
Decision-Making:
Weighing Cost and Benefits
Net Benefits = Benefits - Costs
Environmental
Flows
Economic Value of Water
($ per acre-foot)
Use
Average
Median
Minimum
Maximum
No. of
Values
Recreation/Fish and Wildlife
Habitat Maintenance
48
5
0
2,642
211
Waste Disposal
3
1
0
12
23
Navigation
146
10
0
483
7
Hydropower
25
21
1
113
57
Irrigation
75
40
0
1,228
177
Industrial Processing
282
132
28
802
7
Domestic
194
97
37
573
6
Instream
Withdrawal
Source: Frederick (1997)
Water and Ecosystem Services
Humans
Municipal Agricultural
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Industrial
Water sustains ecosystem
Ecosystem provides valuable services
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Water
As raw material and intermediate inputs to firms
Directly to consumers
Ecosystem
Value of water derives from its contribution to the value of
ecosystem services
Value of Environmental Flows in Production
Instream Flows
Recreation
$$$
The Market
Environment
Aesthetics
Valuation
Approach:
Productivity Method
(net factor income,
derived value)
Firms
Ecosystem
Service
Use
Values
(indirectly through benefits
of ecosystem services)
Value of Environmental Flows
Instream Flows
Recreation
$$$
The Market
Environment
Aesthetics
Value derived from:
• market price of
shrimp
• production process of
the firm
Firms
• relationship of water
to shrimp
Shrimp
Use
Values
(indirectly through benefits
of ecosystem services)
WATER USE IN THE LOWER RIO GRANDE VALLEY
Lower
Rio
Grande
River
River
Agriculture
Allocation
What’s
left over
Environment
Manufacturing
Communities
Eco-tourism
Valley Economy
Value of Environmental Flows
Instream Flows
Recreation
Environment
Aesthetics
Habitat maintenance
Valuation Approaches seek to
estimated “willingness to pay”
• hedonic pricing
• travel cost
• contingent valuation
Waterfoul hunting
Fishing
Recreation and nature
appreciation
opportunities
Other ecosystem
services
Consumers
Use
Values
(indirectly through benefits
of ecosystem services)
Value of Environmental Flows
Instream Flows
Recreation
Environment
Non-use
Values
Consumers
Valuation approach:
Contingent Valuation
Aesthetics
Water to Sustain the Ecosystem:
A “Public Good”?

What is a public good?
high
Open
Access
Resource
Private
goods
Public
Good
Club
Goods
Subtractability
low
low
high
Excludability
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Optimal provision and the “free rider” concern
Questions
?