Transcript Chapter 13. Economics of Water

Chapter 13. The Economics of Water
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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
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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
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Toilets
Bath and shower
Washing machine
Outdoor use
36%
28%
20%
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
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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