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Water Demand Modeling

Water Demand Modeling. Emanuele Massetti FEEM and CMCC Prepared for the Capacity Building Programme on the Economics of Adaptation 2 nd Regional Training Workshop Agenda Bangkok, 30 September – 4 October 2013. Source: http://www.unep.org/dewa/vitalwater/article42.html.

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Water Demand Modeling

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  1. Water Demand Modeling Emanuele Massetti FEEM and CMCC Prepared for the Capacity Building Programme on the Economics of Adaptation 2nd Regional Training Workshop Agenda Bangkok, 30 September – 4 October 2013

  2. Source: http://www.unep.org/dewa/vitalwater/article42.html

  3. Source: http://www.unep.org/dewa/vitalwater/article43.html

  4. Water uses • World Bank Data

  5. Water and Climate Change

  6. Water infrastructures artandfoodofitaly.blogspot.com dx.cooperhewitt.org

  7. Water infrastructures www.thisoldhouse.com -

  8. Why pricing water? • More efficient allocation across alternative uses • Prices direct water where it is more valuable • Prices more efficient than other approaches • Reduces water losses: • Demand: more efficient water uses • Supply: more efficient distribution of water • Allows raising revenues for investments The following slides use material from Sheila M. Olmstead and Robert N. Stavins (2007), “Managing Water Demand Price vs. Non-Price Conservation Programs.” A Pioneer Institute Working Paper, No. 39, July 2007. This is an excellent and accessible introduction to water pricing.

  9. Pricing of water (Theory) • Buyers: • Willing to pay more for more units as scarcity increases • Downward sloping demand curve • Sellers • Efficiency requires that water be sold at the long-run marginal cost • Willing to supply more as price increases • Upward sloping supply curve • Equilibrium • Marginal benefit equal to marginal cost

  10. Equilibrium in the market for water (Theory) $/unit supply demand units

  11. Inefficient water pricing (Reality) • Water is not typically traded in efficient markets • Water not sold at the long-run marginal cost • Water is priced too low • Excessive use of residential water • Relocation of industries and agriculture where water is not abundant • Inefficient use of water in industry and agriculture

  12. Pricing methods • Flat water fees (unmetered) • No incentive to save water • Easy to administer • Volumetric rates (metered) • Increasing block prices • Decreasing block prices

  13. Block tariffs • IBP: • Affordability, right to water • If too cheap, low investment • DBP: • Subsidy to high consumers • Possibly unsustainable patterns http://www.unep.org/dewa/vitalwater/jpg/0296-tariff-EN.jpg

  14. Demand elasticity of water to price

  15. Demand functions of water

  16. Estimates in the literature Most studies based in developed countries.

  17. Price elasticities from demand functions • Demand curves for water in particular sectors • A demand curve explains water consumption as a function of marginal prices and a set of other important variables that influence consumption. • Urban residential water demand: • price, household income, family size, home and lot size, weather...

  18. Price elasticities from demand functions • Urban residential water demand: • price, household income, family size, home and lot size, weather... • Industry and agriculture • Demand as a function of industrial processes, of crop choices and irrigation technology • In the long-run industrial process and agricultural technologies, including crops and land uses are endogenous

  19. Survey methods in the absence of water markets • Willingness to pay (WTP) is the maximum amount a person would be willing to pay, sacrifice or exchange in order to receive a good (or to avoid something undesired, such as pollution) • A market transaction occurs when the price is equal or lower than the WTP • WTP as upper-bound to the price • Several survey methods have been developed to measure consumer willingness to pay. • Hypothetical • Actual

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