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AGEC/FNR 406 LECTURE 34

AGEC/FNR 406 LECTURE 34. You are here!. Efficient allocation of scarce water. Key issue: Does withdrawal exceed recharge?. If not: problem is static: Goal: allocate among competing users to maximize sum of net benefits.

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AGEC/FNR 406 LECTURE 34

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  1. AGEC/FNR 406 LECTURE 34 You are here!

  2. Efficient allocation of scarce water Key issue: Does withdrawal exceed recharge? If not: problem is static: Goal: allocate among competing users to maximize sum of net benefits If so: scarcity exists, problem is dynamic Goal: allocate among competing users to maximize NPV of benefits

  3. Efficient allocation of surface water Efficient allocation must: 1. Share resources among competing users (consumptive and non-consumptive) 2. Handle inter- and intra-annual supply variability

  4. $/unit Quantity of water Efficient allocation of surface water: Case 1 (scarcity) A S1 Aggregate Marginal Net Benefit B MNB QB QT QA

  5. $/unit Quantity of water Efficient allocation of surface water: Case 2 (no scarcity) A S2 Aggregate Marginal Net Benefit B MNB=0 QB QT QA

  6. $/unit Quantity of water Efficient allocation of surface water: Case 3 (restricted supply) A S3 Aggregate Marginal Net Benefit MNB B QB=0 QA=QT

  7. Efficient allocation of groundwater Efficient allocation must: 1. Account for depletion (MUC > 0) 2. Result in a price that rises over time in recognition of increasing scarcity

  8. Quantityextracted Marginalcost ($/unit) Time Time Time path of water price from a depletable aquifer with no substitute MC MUC MEC

  9. Quantityextracted Marginalcost ($/unit) Time Time Time path of water price from a depletable aquifer with a substitute MC ofsubst. MC MUC MEC

  10. Key Points 1. In a number of locations, current rates of water use exceed rates of recharge. 2. Efficient allocation of a scarce resource requires a marginal user cost be associated with its use (scarcity rent!). 3. Prices charged for water typically do not include MUC and rarely create incentives for conservation.

  11. Key Insights • A replenishable resource will be depleted if the rate of use exceeds the rate of recharge. • Pumping from a groundwater aquifer will stop when: - MEC > MB - MEC > MC of substitute - the well runs dry

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