Week 12 - Water Flashcards
What is the Hydrological circle?
Where is our water?
2.5% is fresh water, of that 2.5% large proportions are in glaciers and ice caps, then ground water
Opportunity cost of water
Once water is used, it is not available to be used for ‘something else’
The potential use that is most important for the opportunity cost is the potential use that has the highest net benefit or the most beneficial use. This is the ‘highest forgone opportunity’.
Contemporaneous and intertemporal OC
Contemporaneous OC:
- Not being about to use the water in the current time
- Both ground and surface water
Intertemporal OC:
- Not be able to use this water in the future time period
- Only ground water has this intemporal opportunity cost.
- Once extracted, will only replenish at a very slow rate.
We need to ensure that the price paid for water takes into account future oc as well.
Instream vs Off-stream use of water
Off-stream (consumptive):
- Takes place waya from natural system.
- E.g. Irrigation and mnucipal water
In-stream (non-consumptive):
- Uses that leave water in the natural hydrologic system
- E.g. waterways transportation, hydroelectric power generation.
How do we assign water use rights for rural water?
2 models are used:
- Riparian rights (owner’s adjacent land to the water has right)
- Prior appropriation doctrine: First party to make use of the water supply has the right.
US:
- Initially riparian rights. Allocated too much rights.
- Prior appropriation doctrine: first person using the water for a ‘beneficial use’ can continue to take the same quantitiy of water for the same purpose.
- Beneficial use: agriculture, indusy and households.
US involvement in 1900s
Government became active in area of water resource management:
- Deemed water rights as usufruct rights
- Meaning no one could own the water, but people could use or enjoy it.
- Ensured water cannot be transported outside of the district.
- Regulated the fee irrigation infrastructure owners charged
Centralised the process of water and management.
How did Australia allocate water?
Overallocation of water rights.
Initially, water rights were attached to land (thus could only be exchanged if land was sold)
- Later, was unbundled and allowed to be sold or traded
Further – Rights changed to two components:
- Entitlement – right to ‘permanent water’
- Right to an amount of water every year as long as the water is actually avaialble in this year
- Theoretical upper limit
- Allocation – right to ‘temporary water’
- Right to an amount available water in a specific year
- This is the actual available limit of water in a given year.
E.g. with a lot of rain Entitlement = allocation, during drought entitlement>allocation.
Similar to ITQ system.
Similar to shares and dividends. Shares are the entitelemtn, dividends are the allocation.
What are the market failures in rural water?
Improperly defined property rights
Negative externalities
Inappropriate government intervention
How is rural water an improperly defined property right?
Water rights are typically ‘use it or lose it’
- Must use it in the current period, cannot save or sell it.
Australia ‘carryover’ provision:
- Water rights owners to ‘save’ water for the next period. Only possible for regulated (e.g. by the dam)
- Not possible for unregulated (i.e. a river).
- An incentive to use more water in the current period.
- The water right is lost if not used in the current period.
Not exclusive:
- Where water levels are unregulated (no dam)
- Water rights are conditional
- Conditional on upstream measuring point meeting the minimum height requirement.
- Therefore, upstream users influence the availability of ‘reliable’ water for downstream users.
Not transferrable:
- Many water rights system does not allow for trading.
- Thus not easy to transfer water from low value to high value use.
- For example, residential users may not able to acquire water from, for example, industries and agricultural use even if the value associated with the water is much higher.
How is rural water impacted by negative externalities?
Flow impact
Impact on ecology, certain species
Salinity
Water rights users are not held responsible for the negative externality, and thus do not face the costs.
How is inappropriate government intervention a market failure?
Economic development
In-stream vs off-stream
Economic Development:
The demand for water is highly interlinked to economic development:
- I.e. more development, more demand for water.
Government subsidies dams, irrigation systems and subsidies for water users.
In-stream vs off-stream
Conflict exists, nonmarket value vs market value (agricultural use)
Instream rights do not exist (e.g. use in its natural context)
The government tries to manage instream flows (environmental flows) via:
- Buy-back schemes
- A system of entitlements vs allocation (in regulated rivers)
Conditional use rights (in unregulated rivers).
How is urban water provided?
Via a central planner (e.g. government owned monopoly service provider or local council)
- Conflict of interest:
- Governments are setting standards (enviornmental, water quality, service level) that they themselves have to comply with.
The decision as to how much water supply (desalination and reservoirs) is decided by a ‘central planner’
What is the problem with providing urban water?
What comprises the cost of providing urban water?
Capital intensive:
- Requires sanitation, reservoirs, water distribution networks, sewage collection and treatment plants, pumping stations, water treatment facilities.
- Highly capital intensive.
Long distance water transporation can be very expensive (water is heavy, costly to move against gravity).
LRMC pricing:
- Pricing of water is based on the cost of investing in and operating the infrastructure required to provide the water.
Government will charge the average long run marginal cost, per unit of water.
- This type of pricing is called ‘postage stamp pricing’
- I.e. as the price is applicable over a large area (e.g. melbourne)
What are the main criticisms of LRMC?
6 of them
- Inaccurate pricing.
LRMC do not reflect the variation in cost of providing ther service to customer at different location.
- Servicing some customers is more expensive than others
- E.g. customers who are uphill or further away from a reservoir would be more expensive to service.
- LRMC does not reflec thte users value and willingness to pay for water
- Pay the same price regardless of their value
- LRMC does not reflect opportunity cost of water
- Regardless of what else the water could be used for
- E.g. the enviornment’s need for this water is ignored.
- Externality costs, such as cost imposed on the enviornment are not factored into LMRC
- Typically, encionrmental impact is managed by government separate from providing water.
- This negative externality is not factored into LMRC price.
- Through the LRMC pricing there is no price associated with the water itself.
- It is acquired at $0 (i.e. falls into reservoir/dam)
- The water is charged to customers “per unit of water” it is not the water that is charged for, it is the cost of providing the water.
- The LRMC does not reflect the supply conditions or the scarcity of water
- Regardless of drought or flood, the price of water will dependent on the cost of investment, not by the availability or abundance of water.
- E.g. the price of concrete and steel used for infrastructure, will likely display a greater correlation to water prices than water supply itself.
- Interest rates as well are a cost of capital à prices of water could increase
Summary:
- Price charged (LRMC) is not related to
- The supply and demand conditions of water
- Or the underlying envrionmental realities (opportunity costs, externalities).
What are the outcomes of pricing at LRMC?
The price paid omits:
- Scarcity value, OC, externality, and the wilingness to day.
Thus will likely be low price for water.
Lower prices lead to:
- A inefficiently low water savings investment
- Investing in saving water makes no sense, as it is more economically sound to just purchase more water.
Water waste is high.
No market mechanism to signal water scarcity or reduce consumption when there is a drought.
Water deamnd will not decrease as prices are not attached to water scarcity.
Further inefficient outcomes: living (far away, or uphill)
No mechanism to reallocate water to other time periods, or other users.
How do water utilities charge their tariffs (fees to customers)?
What is the variable charge rate structure?
