Replenishable but Depletable Resources: Water

1. Replenishable but Depletable Resources: Water You will never miss water, till your taps get dry.

2. Supply of water • Our renewable supply of water is controlled by the hydrologic cycle –only a fraction available for humans – of which 2.2% is freshwater – just 0.01% available for us • Replace body fluids + food sources depend on it • Current supply is 10 times more than consumption Surface water & ground water • withdrawals: in US in 2000 – 262 b gallons per day – of which 83 b g from ground water • Worldwide 1.5 b depend on groundwater for drinking supplies (2002) – agriculture largest consumer

3. Rain Clouds Rain Clouds formation Evaporation Vegetation Surface run-off Groundwater Soil Ponds Deep Percolation Ocean

4. 1.5 billion people depend on ground water • Agriculture : largest consumer • Water diversion is common (Tucson) but increasingly unavailable • Quality of water – depletion & contamination is a problem – limits supply of potable water • Excessive withdrawal from aquifers  sudden sinking of land • Groundwater – bore wells – difficult to replenish • Water shortage everywhere – Mexico city/India • Is this allocation efficient?

5. Efficient allocation of Scarce Water • Efficiency depends on whether surface water & ground water is trapped? • Surface water: absence of storage –competing users - supply by nature - future generations not affected by withdrawal practices today • Ground water: withdrawal now affects future – allocation over time is crucial

6. Surface Water: Efficient Allocation • Many uses / users – for efficient allocation: (1) Strike balance among a host of competing users (2) find an acceptable means of variable supply of surface water each year • Supply not constant – changes in a year & year to year ∴ allocated in the fashion when MNB is equal for all users • If MNB s are not equalised - transfer water from low MNB to high MNB

7. S0 S1 • A & B: individual net benefit curves – Supply: So water available OQTo Per unit A MNB1 B Aggregate MNB MNB0 0 QB0 QA1 QA0 QT0 Quantity of water =QT2

8. If supply of water changes to S1 then B use receives no water – A gets it all • Why is allocation so radically different between S0 & S1 ? • MNB curve of use A is above that of use B, shows that as supply falls the cost (forgone net benefits) of doing without water for A is higher than that of B • To minimise the cost more burden is on B than on A • Efficient allocation those who find substitutes or conserve receive smaller allocation as supply diminishes than those who have few alternatives

9. Groundwater • Depletable • Withdrawals > recharge: resource will be mined until – • Supply gets exhausted or • MC of pumping additional water gets prohibitive • Substitute to groundwater – proximity to surface water • Price rises over time until the point of exhaustion or until marginal pumping cost gets prohibitive or MC of pumping = next least expensive source of water i.e. when MC of pumping = price • If ground is porous groundwater withdrawals can affect surface water flows

10. The Current Allocation System • In US (& also in India) the means of allocating water differ from one geographic area to the other • Property rights - ‘Riparian rights’: right to use water to one staying adjacent to water • Gold mining - demand for change in property rights structure - need for transferability • Evolution in mining camps became the forerunner of ‘prior appropriate doctrine’. • Shifting of water to more useful uses - from surplus to deficit areas - Irrigation system by private companies - agriculture flourished • Public ownership - ‘usufructory rights’

11. State control on rates of water transfer by private companies • Demand still high – profits high – large scale water diversion • Federal role originated in 1800s – out of concern for country’s development & economic growth - built network of inland waterways for transportation • 1902: Reclamation Act: federal govt. built 700 dams to provide water & power to help settle the West • Subsidy for water supply

12. Inefficiency • Current system not efficient - due to restrictions on water transfers - MNB should be equal in all uses – trading rights for water  efficiency • Inefficiently low prices • Allocation inefficient - transfers from agriculture to municipality are common as it raises the marginal benefit • Subsidies - Rate structure & prices both are at fault • Prices low as (i) historic ACs are used to determine rates (ii) marginal scarcity rent is rarely included • Efficient pricing should use MC & not AC – water utilities are capital intensive with large fixed costs in SR

13. S-Run AC will be falling  MC falls below AC - ∴ Mc pricing will not generate enough revenue to cover costs • Low pricing & ignoring marginal scarcity rent will promote excessive demand for water • 2001: conflict between off-stream & in-stream users • Without formal recognition of in - stream flow rights, the value of species cannot be properly incorporated into allocation of decision

14. Common Property Problems • Open access resource – depleted too rapidly • Users loose interest in conserving - marginal scarcity rent ignored • In an efficient market incentive to conserve groundwater is created by the desire: • To prevent pumping costs from increasing too rapidly • To capitalise on increasing prices that would rise in future • Conserver: no exclusive right to the water saved • People on the periphery of aquifer would be hit 1st – at center supply for longer time

15. For open – access resources economic theory suggests several direct consequences: • Pumping cost rises rapidly – initially price low • Too much consumption by early users • Burden of this waste not shared uniformly • Aquifer – bowl shaped – centre supply water for longer time • Future users hit hard • For coastal aquifers salt water intrusion is an additional cost

16. Potential remedies • Reforms to promote efficiency of water use, while keeping in mind interests of future generations • Reduce number of restrictions on water transfers - “use it or loose it” – extravagant use of water • Pricing practices for irrigation water: Two part & volumetric pricing, output pricing, block rates, input pricing, area pricing • Water: free good – charge only distribution cost- scarcity value should be charged

17. Uniform rate structure • Various variable charges Declining block rate structure Per Unit Cost Inverted block rate structure Peak Seasonal peak rate structure Non-peak Usage

18. Role of Water & Politics – 1976: Tucson • Privatisation of water supply – monopoly excessive rates – when rights allocated fairly & enforced consistently, privatisation of access rights can become beneficial for all users & not only to the rich • Water scarcity is not merely a problem to be faced at some time in the distant future. In many parts of the world it is already a serious problem & unless preventive measures are taken it will get worse . The problem is not insoluble, though to date the steps necessary to solve it have not yet to been taken.

19. To sum up • Water scarcity is already a serious problem • Current use of water exceeds replenishable supplies, implying that aquifers are being irreversibly drained. • Replenishable water should be allocated to equalise the MNB • Ground water requires that the user cost of be considered • Reforms are possible