Part IV. Renewable Resources

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Part IV. Renewable Resources

1. Fish
2. Forests
3. Water
4. Biodiversity

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C. Water

• Chapter 15

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Introduction

• 4 distinct problems have arisen that affect the
  availability of water
• In many areas of the country the use of water
  exceeds the rate at which it is being
  replenished.
• Many activities use water as an input, and when
  the water is returned to surface or groundwater,
  its quality is diminished.
• Many activities use surface or groundwater as a
  means to dispose of waste, creating water quality
  problems.
• Degradation of ecosystems weaken their ability to
  store water and modulate the drought/flood cycle.

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Water Consumption

• Within the resource taxonomy there are 3
  categories
• Renewable resources, in which the stock
  regenerates itself
• 2. Resource flows, where a never-ending flow
  comes from a nondepletable stock
• Exhaustible resources, fixed amount
• Water can be described as all 3

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Renewable

• Water, in general, meets the definition of a
  renewable resource, where the evaporation from
  the oceans and other water sources creates the
  precipitation that replenishes the oceans.
• Smaller water bodies, however, do not generally
  replenish themselves.
• The evaporation from a river does not provide the
  water source for a river (with the exception of
  very large systems like the Amazon)

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Resource flow

• Water in riverine systems can be viewed as a
  resource flow.
• The water that arrives at any particular point
  along the river is independent of the amount of
  water that is taken out at that point.
• More important, a decision to remove water today
  will not affect the amount of water that is taken
  out tomorrow

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Exhaustible

• However, can view river water as exhaustible in
  the sense that an upstream users decision to
  remove water reduces the amount of water
  available to downstream users.
• Some water resources can be viewed as exhaustible
  because the rate of growth of the stock is small
  in relation to the use of the water.
• "Fossil water," which is water that has
  accumulated slowly in underground aquifers over
  millions of years is an example of an exhaustible
  resource.

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Water availability

• If the flow of a river is much larger than the
  withdrawals of water to meet consumptive and
  productive needs then there will be no resource
  allocation problem, even if the water is
  available at zero cost.
• However, if the flow of water is not capable of
  meeting all needs at any point in time then a
  shortage will develop.
• At a price of zero, quantity demanded of water is
  greater than amount available and as price rises,
  the least valuable needs will be left
  unsatisfied.
• If price is continually raised, eventually
  quantity demanded will equal the amount of water
  available.

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Scarcity and the price of water

• Figure 15.1 illustrates how essential scarcity is
  in determining price.
• In this figure g0 represents the daily volume of
  water that may be removed from the river.
• The cost of extraction is zero.
• Demand is represented by D1.
• Under these circumstances, all the demand that
  exists at zero price will be satisfied.
• However, if Demand increases to D2, all the
  demand at zero price cannot be satisfied.
• As demand increases, the opportunity cost/user
  cost of consuming the fixed flow of water
  increases, which is reflected in the increased
  price (remember, assumed MEC 0)

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Property rights

• Property rights must be well defined in order for
  a market and a price to exist.
• Price will also reflect the MC of producing
  water.
• The cost of producing water takes the form of
  purification, transportation, etc.
• If property rights are not well defined or other
  conditions result in market failure, then the
  price will be too low and this will lead to
  shortage as illustrated in Figure 15.2.
• Here, the price at which quantity demanded equals
  fixed quantity supplied is p0, but a price of p1
  would lead to a shortage equal to g1-g0.

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Property rights

• Property rights to water are a big issues in the
  Western US where most rights are defined on a
  state-by-state basis.
• Appropriation-based water rights make water
  available for use by anyone who can apply it to a
  beneficial purpose.
• Priority goes to the user who establishes his or
  her appropriation-based rights first.
• Initially these rights were nontransferable but
  increasing demand for water has led western
  states to make them transferable.
• This has created a market for water and the
  potential to use market mechanisms to protect
  ecological uses of water.

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Water as resource flows

• In eastern and Great Lakes states, water
  resources can be viewed primarily as resource
  flows, where most cities and agricultural areas
  depend on surface water or groundwater that is
  generally replenished by normal rainfall.
• One mechanism that often leads to urban water
  problems is the process by which water is priced
  and distributed to customers.
• This is usually done by either a regulated water
  utility or a municipal water company.
• In both cases there are political or regulatory
  forces that push the price of water below its
  opportunity cost.

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Monopoly water pricing

• When water is provided by a regulated monopoly,
  the scarcity value of water is not incorporated
  into the price, only costs of the other inputs
  used in purifying and distributing water.
• If the price of water is below the opportunity
  cost, a shortage will develop and other means
  will have to be used to allocated the water.
• There is no guarantee that these alternative
  methods will result in an efficient allocation of
  the water.

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Public pricing

• Alternatively, if a city elects to provide
  distribution of water as a city service,
  political pressures may keep rates low (e.g.,
  agricultural special interests), again allowing
  no mechanism for reflecting the value of
  alternative uses.
• When consumers of water in an apartment building
  pay a rate based upon use by the entire building
  (average price) rather than an individual rate
  (marginal price) there is no strong incentive to
  conserve use (condominiums whole building
  metered, not individual units)

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Public pricing

• Even if water is priced according to marginal
  willingness to pay, there may still be market
  failure if the pricing structure does not reflect
  the ecological opportunity cost of water (flows
  of water necessary for aquatic life).
• 2 basic ways to reflect the ecological
  opportunity cost of water include
• Government tax on water use
• Purchase of water rights by NGOs where the water
  is left in the stream.

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Water as an Exhaustible Resource

• Water resources in western states are better
  described as exhaustible resources (rate of use gt
  recharge)
• The economic analysis of water as an exhaustible
  resource is very similar to the analysis of water
  as a resource flow, only there is an additional
  opportunity cost.

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2 opportunity costs

• The first opportunity cost is the cost of not
  having water for another current use, the
  contemporaneous opportunity cost.
• The second is the opportunity cost of not having
  the water available for future use, which results
  from current use depleting the stock available,
  which is called the intertemporal opportunity
  cost.
• An efficient allocation of water would require
  that the price reflect both contemporaneous and
  intertemporal opportunity cost.

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Degrading Uses of Water

• There are 3 types of uses that degrade water
  quality.
• Removal of water from surface water bodies or
  groundwater aquifers generates ecological damage.
  Heavy water withdrawal in the coastal area of
  southern Florida has lead to saltwater intrusion
  into the aquifer.
• When a direct consumer of water uses it and
  returns it to hydrological cycle with wastes and
  contaminants. E.g., residential use of water
  which adds human wastes even when treated, the
  water has a higher level of nutrients which can
  cause ecological damage.
• Activities that generate wastes that are directly
  deposited into or make their way through natural
  mechanism such as run-off from rainfall. E.g.,
  rainfall run-off that carries pesticides from
  agricultural fields.

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US Policy Toward Water Pollution

• U.S. policy toward water pollution has
  historically focused on large point sources of
  pollution.
• Point sources of pollution are those where the
  pollution enters the water body at a specific
  point, such as the end of an effluent discharge
  pipe.
• One of the major thrusts of attempts to reduce
  water pollution was a program to reduce the
  impact of the discharge of municipal sewage.

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US Policy Toward Water Pollution

• Amendments to the Clean Water Act required all
  municipalities to develop and upgrade their
  sewage treatment facilities.
• Programs were designed so that the federal
  government would pay 75 of the costs of the
  facility, and the local government would be
  responsible for the remainder of the construction
  costs and for operating costs.
• The primary reason for the federal government
  involvement was that the social benefits to the
  nation of treating a communitys wastewater was
  greater than the social benefits to the community.

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Command and control

• The subsidized improvements in municipal sewage
  treatment plants were required by the Water
  Pollution Control Act of 1972, the Clean Water
  Act of 1977, and 1977 and 1978 amendments to the
  Clean Water Act (CWA).
• These acts, based on command and control
  techniques, also focused on other large point
  sources of pollution, such as paper plants, food
  processing facilities, and other industries.

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Command and control

• The National Pollution Discharge Elimination
  System (NPDES) made all discharges illegal unless
  authorized by NPDES.
• Polluters were required to use best practical
  technology (BPT) for conventional pollutants and
  best available technology (BAT) for toxic
  pollutants.
• BPT allows for the consideration of cost of the
  technology, BAT does not.

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Economic incentives?

• Economic incentives have not been employed to
  deal with water quality problems.
• While it would be feasible to develop a system of
  marketable pollution permits, it would require
  more interstate cooperation, since all the major
  river systems span several states.
• The use of command and control policies created
  the same types of problems discussed in earlier
  chapters.

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C C problems

• The CWA and associated amendments have not been
  completely successful in meeting the legislative
  goals of restoring and maintaining the chemical,
  physical, and biological integrity of the
  nations water.
• There has been some mixed success in reduction of
  organic wastes from point source polluters.
• However, where nonpoint pollution is a major
  problem, the water quality remains poor.

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Nonpoint source pollution

• Associated with agricultural, urban, and suburban
  run-off.
• Recently new regulations have been developed
  requiring farmers to institute best farming
  practices to control nutrient run-off and soil
  erosion.
• Agriculture remains one of the largest
  contaminators of water resources in the parts of
  the US and in developing countries.

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Nonpoint source pollution

• Even though some progress has been made in
  controlling organic pollutants, the problem of
  toxic pollutants has not been similarly reduced.
• Many areas with healthy fishing populations also
  have prohibitions against consumption of the fish
  due to the high levels of contamination by toxins
  such as PCBs, mirex, dioxin, and heavy metals.

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International Water Issues

• The water problems in other countries
  (particularly developing countries) may be more
  severe than in the United States.
• The primary water problem in developing countries
  is the contamination of water by untreated human
  waste.
• This is true not just in villages, but also in
  very large urban areas such as Rio de Janeiro,
  where large slums intensify the waste problem.
• This is not just a third world problem. In the Po
  River Valley in northern Italy, many cities
  (including Milan) dump untreated wastes into the
  river.
• The Mediterranean Sea suffers from extreme water
  pollution problems which are expected to increase
  as North Africa becomes more industrialized.

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Transfrontier Externalities

• The water consumption and waste disposal
  activities of one country affect water
  availability and water quality in neighboring
  countries.
• This is particularly true in the Middle East,
  where geographically small countries overlie
  common aquifers and where rivers such as the
  Jordan River and the Tigris-Euphrates River drain
  several countries.
• These transfrontier externalities cannot be
  internalized without international agreement.
• The US has longstanding agreements with Canada
  concerning water use and water quality in
  boundary areas, and a special commission to deal
  with Great Lakes issues.
• Agreements with Mexico are being developed.

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Summary

• Although the earths surface is ¾ covered by
  water, uncontaminated water is a scarce resource.
• Many market failures, including externalities,
  nontransferable property rights, and poorly
  conceived regulatory practices contribute to the
  scarcity.
• From a US and international perspective, one
  critically important policy change would be to
  price water so that it included its full
  opportunity cost.
• This would include the opportunity cost of both
  current and future uses of water, as well as the
  costs associated with reductions in the quality
  of water resources.