Copyright © 2013 Jonathan M. Harris Environmental and Natural Resource Economics 3rd ed. Jonathan M. Harris and Brian Roach Chapter 15 – Water Economics and Policy Copyright © 2013 Jonathan M. Harris

Figure 15.1: The Hydrologic Cycle Water is both a renewable and a depletable resource. The water cycle leads to a continual, but limited, flow of fresh water, while lakes and aquifers, along with human-made dams, provide stored water. Many aquifers require centuries to fill, so that drawing water from aquifers is essentially exploitation of a non-renewable resource. Overdraft of groundwater is a problem in all water-short areas of the world including the U.S. West, Central and South Asia, and North China.

Figure 15.2: Global Freshwater Availability, 2007 Water stress or scarcity conditions confront many countries in Africa and South Asia. By 2025, it is projected that more than 2.8 billion people in 48 countries will face water stress or scarcity. Source: UNEP, 2008.

Figure 15.3: Water Consumption per Capita, Select Countries 6000 97% 5000 Percentages show the portion of total water consumption used for agricultural purposes. 4000 Cubic Meters per Person per Year 3000 79% 2000 40% 88% 63% 77% 1000 Irrigation is a primary driver of water demand. Some countries, including the United States, are heavily dependent on irrigated agriculture. 90% 12% 20% 65% 1% 55% 4% 38% Iraq India Japan Mexico China Brazil France Russia Sweden Uganda Germany Turkmenistan United States Saudi Arabia Source: Food and Agriculture Organization, Aquastat database. http://www.fao.org/nr/water/aquastat/main/index.stm.

Figure 15.4: Global Water Demand, 2000 and 2050 6000 Electricity 5000 Manufacturing 4000 Livestock Cubic Kilometers 3000 Domestic Irrigation 2000 1000 Global water demand is growing steadily, and is projected to increase 50% between 2000 and 2050. The increase in demand will come almost entirely in developing countries. Irrigation demand may actually decline, due to increased efficiency, but this will be outweighed by increases in manufacturing, domestic, and electricity needs. 2000 2050 2000 2050 2000 2050 2000 2050 OECD BRIICS RoW World Source: OECD, 2012. Note: BRIICS = Brazil, Russia, India, Indonesia, China, South Africa??; OECD = Organization for Economic Cooperation and Development; ROW = rest of world.

Figure 15.5: Effects of Subsidizing Irrigation Water Price Quantity of Water Demand Supply (MC) Marginal Social Costs (MSC) Q* QE QS PS PE P* Widespread government policies of subsidizing water supply, especially for agriculture, worsen the problem of excessive demand, placing pressure on governments to fund large-scale water supply projects such as dams and water transfer projects. These supply projects have significant economic and environmental costs (areas B and C on graph). In theory, a market price solution could reduce quantity demanded, avoid excessive costs, and gain net social benefits (area A). But major issue of equity arise with water privatization and higher water prices.

Figure 15. 6: Average Monthly Water Bill vs. Precipitation in U. S Figure 15.6: Average Monthly Water Bill vs. Precipitation in U.S. Cities San Diego Santa Fe San Francisco Seattle Memphis Fresno Water prices do not always reflect water scarcity. Some arid regions, such as Las Vegas and Fresno, charge very low rates for water. Source: Walton, 2010.

Figure 15.7: Water Pricing Structures Price per Unit Quantity of Water Used Uniform Rate Structure Increasing Block Rate Structure Decreasing Block Rate Structure An increasing block pricing structure for water encourages conservation by large users, while a decreasing block structure encourages excessive use. As concerns about water conservation have grown, there has been a gradual shift in the U.S. from decreasing to increasing block pricing.

Table 15.1: Value of Water in Various Uses Water use Average value per AF Median value per AF Navigation $146 $10 Recreation/wildlife habitat $48 $5 Hydropower $25 $21 Thermoelectric power $34 $29 Irrigation $75 $40 Industrial $282 $132 Domestic $194 $97 The value of water varies in different uses. Economic principles suggest allocating water to its highest-valued use, but this is often not accomplished in practice. Source: Frederick et al., 1996.