AGEC/FNR 406 LECTURE 34 You are here!

Efficient allocation of scarce water Key issue: Does withdrawal exceed recharge? If not: problem is static: Goal:allocate among competing users to maximize sum of net benefits If so: scarcity exists, problem is dynamic Goal:allocate among competing users to maximize NPV of benefits

Efficient allocation of surface water Efficient allocation must: 1. Share resources among competing users (consumptive and non-consumptive) 2. Handle inter- and intra-annual supply variability

Efficient allocation of surface water: Case 1 (scarcity) QBQB Quantity of water $/unit Aggregate Marginal Net Benefit MNB QTQT QAQA A B S1S1

Efficient allocation of surface water: Case 2 (no scarcity) QBQB Quantity of water $/unit Aggregate Marginal Net Benefit MNB=0 QTQT QAQA A B S2S2

Efficient allocation of surface water: Case 3 (restricted supply) Q B =0 Quantity of water $/unit Aggregate Marginal Net Benefit MNB Q A =Q T A B S3S3

Efficient allocation of groundwater Efficient allocation must: 1. Account for depletion (MUC > 0) 2. Result in a price that rises over time in recognition of increasing scarcity

Time path of water price from a depletable aquifer with no substitute Time Quantity extracted MEC Time Marginal cost ($/unit) MC MUC

Time path of water price from a depletable aquifer with a substitute Time Quantity extracted MEC Time Marginal cost ($/unit) MC MUC MC of subst.

Key Points 1. In a number of locations, current rates of water use exceed rates of recharge. 2. Efficient allocation of a scarce resource requires a marginal user cost be associated with its use (scarcity rent!). 3. Prices charged for water typically do not include MUC and rarely create incentives for conservation.

Key Insights A replenishable resource will be depleted if the rate of use exceeds the rate of recharge. Pumping from a groundwater aquifer will stop when: - MEC > MB - MEC > MC of substitute - the well runs dry