12. Lecture 7 - Water Economics

Question 1

Which one of the following is an example of demand-side water management?

A) Increasing water prices
B) Desalination
C) Building small dams
D) Building large dams
E) Expanded development of groundwater aquifers

Answer 1

A) Increasing water prices

Question 2

Why might supply-enhancement strategies be problematic from a water conservation perspective?

Answer 2

Supply-demand cycles and reservoir effects.

Question 3

Which price structure would most effectively promote water conservation?

Answer 3

Increasing block structure

Question 4

Why is cost recovery a prerequisite for equitable and universal access to basic water supply?

Answer 4

Cost recovery is needed to prevent the free water dilemma.

Question 5

What is the diamond-water paradox?

Answer 5

Water is essential for life and has a low value.

A diamond is not essential for life and has a high value.

How can it be that an essential resource like water has a much lower price per unit weight or volume than diamonds?

Question 6

What is the concept of marginality?

Answer 6

What matters is the value of an additional unit of a good, regardless of the value of the previous unit

Question 7

What may undo the diamond-water paradox?

Answer 7

When marginal water uses become essential uses.

Question 8

Name 3 specific characteristics of water.

Answer 8

1. Essential, needed for survival
2. Finite
3. Non-substitutable
4. Mobile, fugitive, a flux
5. A system
6. Varying availability and quality
7. Bulky
8. Use may create externalities
9. Various uses and users

Question 9

Name 2 implications of the unique characteristics and uses of water.

Answer 9

1. Everyone should have access to water for survival
2. There is not only one water market
3. The value of water differs between different uses
4. We need to manage competing uses
5. We need to take into account system-effects of water use
6. We cannot trade water as any other good

Question 10

What is more price elastic: water demand for drinking or water demand for laundry?

Answer 10

Water for laundry.

Question 11

What is the main challenge of public water management?

Answer 11

Managing a scarce resource with competing uses.

Question 12

Name 3 instruments of public water management.

Answer 12

1. Quotas
2. License to use
3. Subsidies and grants
4. Penalties
5. User charges
6. Tradable water rights

Question 13

Name 2 primary goals of water pricing

Answer 13

1. Economic efficiency
2. Environmental sustainability
3. Equity and affordability
4. Generation of revenues and financial sustainability

Question 14

Match the tariffs with the meanings:

1. Flat tarrif
2. Volumetric tarrif
3. Tiered tariff
4. Two part tariff

A. Rates that change depending on time or amount of use
B. Fixed payment
C. Fixed charge that is independent of the consumed amount and variable charge that depends on the consumed amount
D. Pay per use

Answer 14

1B - 2D - 3A - 4C

Question 15

What is the free water dilemma?

Answer 15

Water provider will not be able to adequately maintain the system. Consequences: unsafe water for poor, while richer people can afford buying from other sources.

Question 16

True or false: volumetric tariffs are more effective than flat tariffs in achieving water use efficiency

Answer 16

True.

Question 17

True or false: block tariffs or a stepped tariff system will never ensure universal access.

Answer 17

False.

Block tariffs or a stepped tariff system can ensure universal access:

• Highest value use (essential water use) is priced lowest
• Lowest value use (non-essential water use) is priced highest

Question 18

What does it mean when water demand exceeds supply?

Answer 18

That the price is too low.

Question 19

What are supply-demand cycles?

Answer 19

Increasing water supply enables higher water demand.

Question 20

What are reservoir effects?

Answer 20

Overreliance on reservoirs increases vulnerability.

Question 21

Name 3 conditions for well functioning water markets.

Answer 21

1. Well defined and administered water rights embedded in law
2. Exchange is easy
3. Low transaction costs (administrative complexity, trading fees)
4. Sales and water use is monitored and enforced
5. Large number of potential buyers and sellers

Question 22

Define “water stressed”.

Answer 22

Term used for countries where freshwater supplies are between 1,700 and 1,000 cubic meters per person per year.

Question 23

Define “water scarce”.

Answer 23

Term used for countries where freshwater supplies are less than 1,000 cubic meters per person per year.

Question 24

Define “absolute water scarcity”.

Answer 24

Term used for countries where freshwater supplies are less than 500 cubic meters per person per year.

Question 25

What is virtual water?

Answer 25

Water embedded in goods or services, based on water used as an input throughout the production process.

Question 26

Name 3 ways to reduce water demand.

Answer 26

1. Micro-irrigation 2. Reuse of wastewater 3. Adoption of water-conserving technologies 4. Mandatory water use restrictions 5. Education and information 6. Innovative institutional design of common-property resources

Question 27

What are regulated monopolies?

Answer 27

Monopolies that are regulated by an external entity, for example through controls on price or profits.

Question 28

What is average-cost pricing?

Answer 28

A water pricing strategy in which price is set equal to the average cost of production (or equal to average cost plus a profit mark-up if the water utility is a for-profit entity).

Question 29

True or false: water demand is less elastic in summer than in winter.

Answer 29

False. Water demand tends to be less elastic in winter months than in summer months. In the summer, more water use is for relatively nonessential purposes, such as irrigating lawns and washing cars. In the winter, a higher percentage of total water use is for more essential tasks, such as bathing and washing dishes.

Question 30

What is a uniform rate structure?

Answer 30

The price per unit of water is constant regardless of the amount of water used.

Question 31

What is increasing block structure?

Answer 31

The price per unit of water increases as the amount of water used increases. The price is constant within each block, but the price per unit is higher for successive blocks.

Question 32

What is decreasing block structure?

Answer 32

The price per unit of water decreases as the amount of water used increases.

Question 33

What are riparian water rights?

Answer 33

A system of water rights allocation based on adjacent land ownership.

Question 34

What are prior appropriation water rights?

Answer 34

A system of water rights allocation in which rights are not based on land ownership but on established beneficial uses.

Question 35

What is beneficial use?

Answer 35

A term used to refer to the use of water for productive purposes, such as irrigation or municipal supplies.

Question 36

True or false: administrative prices are more useful for the purpose of cost recovery, while market-based prices have a larger potential for signalling scarcity and opportunity costs.

Answer 36

True.

Question 37

Name one pro for auctioning water rights and one pro for trading water rights.

Answer 37

Auction: * Dealing with fewer people * More transparent * Buyers might pay a lower price * Lower transaction costs Trading: * Sellers might get a lower price * More economically efficient because of better resource allocation, thus more social welfare * Might encourage monoculture