Water

Question 1

What is the opportunity cost of water difference between ground and surface?

Answer 1

Ground has a Contemporaneous and Intertemporal opportunity costs where as surface only has contemporaneous opportunity costs

Question 2

What is the difference between rural and urban water policies?

Answer 2

Rural = agriculture and natures water

Urban water =

Question 3

What are the market failures of water policy?

Answer 3

Improperly defined property rights
Negative externalities
Inappropriate government intervention

Question 4

What is a key difference between ground water and surface water

Answer 4

Ground water is a stock whereas surface water is a flow.
Storage
Vulnerability to pollution
Cleaning potential
Temperature
Evaporation 
Oppportunity Cost

Question 5

What is the contemporaneous and inter temporal opportunity cost of water?

Answer 5

Contemporaneous: the cost of not having the water available for another use in the current time period.
Intertemporal: the cost of not having the water available in a future time period

Question 6

What is critical to establishing an efficient allocation of water?

Answer 6

An efficient allocation of water would require that the price reflect both contemporaneous and intertemporal opportunity costs.

Question 7

What are the two components of water rights?

Answer 7

1) Entitlement: right to “permanent water”.
Right to an amount of water every year as long as the water is actually available in that year. This is the theoretical upper limit of water the water right holder is entitled to.
2) Allocation: “temporary water”
Right to an amount of available water in a specific year
This is the actually available limit of water in a given year.

Question 8

What is the ‘Preferential Use Right’?

Answer 8

Established an order of ‘value priority’ among competing uses.
Gives certain uses the highest priority for allocation during water shortage.
High priority: industrial use
Low priority: Household gardening and car washing

Question 9

Why are properly defined property rights critical for water?

Answer 9

• May lead to inefficiency
• Property rights not exclusive
• Property right not transferable

Question 10

Examples of inefficiency due to market failure?

Answer 10

• There may be no incentive to conserve water.
• Instream (ecological) use is excluded from considerations.
• If a holder of a right does not use the water, the owner may not be able to sell it to others. In the US system (‘time priority’ system) the owner could lose the right to water altogether if he does not demonstrate beneficial use of water.

Question 11

Explain the negative externality addressed by water policy?

Answer 11

A unit of water used/taken at two different locations may have different negative externalities.
For example, the environmental flow impact or salinity impact may be different in two different locations.

Question 12

What supply side characteristics distinguish water from other resources? Explain each

Answer 12

Mobile resource
water tends to flow, evaporate and seep as it moves through the hydrologic cycle

Variable resource
due to natural climatic fluctuations water availability is variable
the risks of shortage and excess are among the major problems of water management

“High-exclusion cost” resource:
the exclusive property rights which are the basis of a market are relatively difficult and expensive to establish and enforce.
Property rights in urban water context are often not well defined.

Question 13

Why is water elasticity unknown?

Answer 13

We do not have practical examples that would give a good estimate about the price elasticity
Water prices have been supressed and their price has never reached levels that price elasticity could have been ‘tested’.

Question 14

What are the barriers that must be overcome for water transactions?

Answer 14

Geographical barriers
- Transportation to the point of use (tunnels, canals, pipelines)
Temporal barriers
- Storage
Quality barriers
- Purification and pollution control (chemicals, radioactive materials, salt, bacteria, etc.)

Question 15

What are the key characteristics of urban water management?

Answer 15

Capital-intensive
- Providing the water and sanitation infrastructure is highly capital intensive

High fixed cost and low marginal cost
- Providing the infrastructure is high cost but once it is provided the marginal cost of providing a unit of water is low

Long distance water transportation can be very expensive
- Water is heavy and water demand (cities and agricultures) is often not where water is available

Question 16

What is one of the key problems with urban water pricing?

Answer 16

Administratively set prices
One mechanism that often leads to urban water problems is the process by which water is priced.
Water utilities are often non-competitive, they are regulated (local) monopolies
Water utilities are usually allowed to charge a price that yields a reasonable rate of return on their capital investment

Question 17

What leads to inefficient urban water prices? What are the consequences?

Answer 17

Prices charged by water distribution utilities do not reflect the value of water (scarcity value, economic rent) or the opportunity cost of water (the value of alternative use).
The water itself (the commodity) is treated as a free good.
Rate structures do not adequately reflect the variation of costs of providing service to customers at different locations.
Low prices lead to a significant amount of waste and lack of investment into water conservation (demand side management) and supply augmentation.

Question 18

Explain the difference between the declining and inverted block rates?

Answer 18

A Declining Block Rate (Regressive tariff) has High initial per unit costs and than decreasing per unit costs. This promotes efficiency because it reflects actual cost for the supplier.
Inverted Block Rates (Progressive tariffs) has Low initial rate for initial units of consumption and increasing rate with volume. Often considered equitable for residential consumers because everyone (incl. low income users) can pay a lower marginal price for the essential units of water.

Question 19

What is the problem with the IBT?

Answer 19

High fixed upfront cost of water supply and providing service may not be recovered with this pricing.

Question 20

Why is urban water cheaper than rural water?

Answer 20

High density of consumers in the urban areas make the per capita investment for water services much smaller than in rural low density areas

Question 21

What are the two responses to water scarcity?

Answer 21

Supply-oriented focuses on new resources and expansion of the network infrastructure (e.g. desalination plant)
Demand-oriented focuses on the development of water conservation and management programs to influence water use.