The Economics of Water for Environmental Flows

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

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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?

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What is Economics?
Unemployment
Macroeconomics
Inflation
The economy as a whole
Federal Reserve
Interest rates
GNP
Microeconomics
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What is Economics?

• Positive What is
• Normative What should be

Objective Utilize resources in a way that
maximizes benefits
Efficiency
8
What is economic value?

Marginal Costs (Supply)
Price
Marginal Benefits (Demand)
Quantity
Quantity
9
Economics and Water
Humans
Water

• Water users
• Water demand
• Water supply
• Allocation across competing uses
• The importance of economic value

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The Cost of Water
marginal cost
marginal benefits (demand)
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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

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Water Demand

Total Demand
Q
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Decision-Making Optimal Allocation
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Decision-MakingWeighing Cost and Benefits

• Net Benefits Benefits - Costs

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Decision-MakingWeighing Cost and Benefits

• Net Benefits Benefits - Costs

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Decision-MakingWeighing Cost and Benefits

• Net Benefits Benefits - Costs

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Economic Value of Water( per acre-foot)
Use Average Median Minimum Maximum No. of Values
Instream
Recreation/Fish and Wildlife Habitat Maintenance 48 5 0 2,642 211
Waste Disposal 3 1 0 12 23
Navigation 146 10 0 483 7
Hydropower 25 21 1 113 57
Withdrawal
Irrigation 75 40 0 1,228 177
Industrial Processing 282 132 28 802 7
Domestic 194 97 37 573 6
Source Frederick (1997)
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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

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Value of Environmental Flows in Production
Instream Flows
Recreation
Aesthetics

• Environment

The Market
Valuation Approach Productivity Method (net
factor income, derived value)
Firms
Ecosystem Service
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Value of Environmental Flows
Instream Flows
Recreation
Aesthetics

• Environment

The Market

• Value derived from
• market price of shrimp
• production process of the firm
• relationship of water to shrimp

Firms
Shrimp
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WATER USE IN THE LOWER RIO GRANDE VALLEY
Lower Rio Grande River
Agriculture
Allocation
River
Whats left over
Environment
Manufacturing
Communities
Eco-tourism
Valley Economy
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Value of Environmental Flows
Instream Flows
Recreation
Aesthetics

• Environment

Habitat maintenance Waterfoul hunting Fishing Recr
eation and nature appreciation opportunities Other
ecosystem services

• Valuation Approaches seek to estimated
  willingness to pay
• hedonic pricing
• travel cost
• contingent valuation

Consumers
23
Value of Environmental Flows
Instream Flows
Recreation
Aesthetics

• Environment

Consumers
Valuation approach Contingent Valuation
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Water to Sustain the EcosystemA Public Good?

• What is a public good?
• Optimal provision and the free rider concern

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• Questions

?