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The Economics of Water for Environmental Flows

The Economics of Water for Environmental Flows. Mitchell Mathis Houston Advanced Research Center Presentation for the Science Advisory Committee to the Study Commission on Water for Environmental Flows June 18, 2004. Overview. What is economics? What is economic value?

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The Economics of Water for Environmental Flows

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  1. The Economics of Water for Environmental Flows Mitchell Mathis Houston Advanced Research Center Presentation for the Science Advisory Committee to the Study Commission on Water for Environmental Flows June 18, 2004

  2. Overview • What is economics? • What is economic value? • Economics and water • Economic value of environmental flows • Economics and the allocation of water for environmental flows

  3. What is Economics?

  4. What is Economics?

  5. What is Economics? • The study of scarcity, choices, and tradeoffs? • The study of production and consumption? • The study of markets? • The study of how to use resources in a way that produces the most benefits? • The study of human welfare?

  6. Markets Individual economic behavior Consumers Firms What is Economics? Unemployment Macroeconomics Inflation The economy as a whole Federal Reserve Interest rates GNP Microeconomics

  7. What is Economics? • Positive: “What is” • Normative: “What should be” Objective: Utilize resources in a way that maximizes benefits “Efficiency”

  8. Consumer Surplus Producer Surplus What is economic value? $ Marginal Costs (Supply) Price* Marginal Benefits (Demand) Quantity* Quantity

  9. Municipal Agricultural Industrial Ecosystem Economics and Water Humans Water • Water users • Water demand • Water supply • Allocation across competing uses • The importance of economic value

  10. with infrastructure subsidy with infrastructure subsidy and no charge for raw water subsidy Price paid for water rarely reflects scarcity, economic value => The Cost of Water marginal cost marginal benefits (demand)

  11. $ $ $ $ Q Q Q Q Municipal Agricultural Industrial Environmental Water Demand • Relates quantity demanded to price paid • Demand reflects willingness to pay/marginal benefits (a source of economic value) • For many water uses marginal benefits (demand) are not well understood, especially environmental uses

  12. $ $ $ $ Q Q Q Q Municipal Agricultural Industrial Environmental supply Without demand for environmental flows Water Demand $ Total Demand Q

  13. $ $ $ $ Q Q Q Q Municipal Agricultural Industrial Environmental Environmental Industrial Industrial Optimal Maximizes total benefits Sub-Optimal Does NOT maximize total benefits Agricultural Agricultural Municipal Municipal Decision-Making: Optimal Allocation

  14. Environmental Flows Decision-Making:Weighing Cost and Benefits Net Benefits = Benefits - Costs

  15. Environmental Flows Decision-Making:Weighing Cost and Benefits Net Benefits = Benefits - Costs

  16. Environmental Flows Decision-Making:Weighing Cost and Benefits Net Benefits = Benefits - Costs

  17. Economic Value of Water($ per acre-foot)

  18. Municipal Agricultural Industrial Ecosystem Water and Ecosystem Services Humans Water • Water sustains ecosystem • Ecosystem provides valuable services • As raw material and intermediate inputs to firms • Directly to consumers • Value of water derives from its contribution to the value of ecosystem services

  19. Use Values (indirectly through benefits of ecosystem services) Value of Environmental Flows in Production Instream Flows Environment Recreation Aesthetics $$$ The Market Valuation Approach: Productivity Method (net factor income, derived value) Firms Ecosystem Service

  20. Use Values (indirectly through benefits of ecosystem services) Value of Environmental Flows Instream Flows Environment Recreation Aesthetics $$$ The Market • Value derived from: • market price of shrimp • production process of the firm • relationship of water to shrimp Firms Shrimp

  21. WATER USE IN THE LOWER RIO GRANDE VALLEY Lower Rio Grande River Agriculture Allocation River What’sleft over Environment Manufacturing Communities Eco-tourism Valley Economy

  22. Use Values (indirectly through benefits of ecosystem services) Value of Environmental Flows Instream Flows Environment Recreation Aesthetics Habitat maintenance Waterfoul hunting Fishing Recreation and nature appreciation opportunities Other ecosystem services • Valuation Approaches seek to estimated “willingness to pay” • hedonic pricing • travel cost • contingent valuation Consumers

  23. Non-use Values Value of Environmental Flows Instream Flows Environment Recreation Aesthetics Consumers Valuation approach: Contingent Valuation

  24. Open Access Resource high Private goods Subtractability Public Good Club Goods low low high Excludability Water to Sustain the Ecosystem:A “Public Good”? • What is a public good? • Optimal provision and the “free rider” concern

  25. Questions ?

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