Water Demand Modeling

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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

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Source http//www.unep.org/dewa/vitalwater/articl
e42.html
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Source http//www.unep.org/dewa/vitalwater/articl
e43.html
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Water uses

• World Bank Data

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Water and Climate Change
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Water infrastructures
dx.cooperhewitt.org
artandfoodofitaly.blogspot.com
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Water infrastructures
www.thisoldhouse.com -
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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.
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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

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

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Pricing methods

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

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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-tarif
f-EN.jpg
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Demand elasticity of water to price

•  

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Demand functions of water

•  

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Estimates in the literature
Sector Estimates
Residential demand -.33 / -.38
Industrial demand -.44 / -.97 -.15 / -.98 -.10 / -0.79
Agriculture -.48 to -1.24
Most studies based in developed countries.
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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...

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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

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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