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Water valuation methods and economicinstruments
To know about main water valuation
methods for supporting the use of
economic instruments.
To be able to evaluate the pros and
cons of using specific water valuation
methods in different water situations.
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Outline
A cost benefit-analysis framework
Supply and demand
Main approach: full cost recovery
Description of main water valuation methods
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Introduction
Economic instruments are important for water management,
especially when there are notorious supply-demand imbalances and
misallocations.
As markets are seldom available for solving these problems, water
authorities will decide about levels and features of water tariffs in
order to influence behaviour and allocations.
In deciding about this, information is required regarding how users
value different water services.
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Multi-sector use and water valuation
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Importance of cost-benefit analysis
To reallocate water among
alternative uses or type of users;
To expand water infrastructure;
These decisions will
generate potential benefits
To improve the quality of water;
To expand the water service to
include sanitation and wastewater
treatment;
To include water management
actions at the basin level (very
important for IWRM);
ut a so costs or water
stakeholders
The main objective of cost-
benefit analysis is to
appropriately measure and
attribute these benefits and
costs.
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Water valuation and economic instruments
Even if a market is not in place for water service, demand andWTP exist and reflect how much are the water services valuedby users.
in the process of generating the benefits.
Challenge for valuation methods is how to measure benefitsof water services given situations in which there are not
observable markets or prices for those.
Equally important are correct estimation of costs andappropriate levels of tariffs to be charged directly to mainbeneficiaries.
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Demand function and residential use (1)
Close to be a private good but under monopolistic provision
Demand can be estimated looking at consumer behaviour and tariffchanges:
Qw = Qw(Pw,Pa,P;Y;Z)
where
Qw: the individuals level of consumption of water in a specifiedtime period;
Pw: price of water;
Pa: price of an alternative water source;
P : average price index representing all other goods and services;
Y : consumers income, and
Z : vector representing other factors, such as climate andconsumer preferences.
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Demand is estimated using econometric methods applied to
data from water use, tariffs and local and users attributes.
Demand function and residential use (2)
When this type of data is not available (or for new projects),
hedonic price methods and contingent valuation methods are
also used
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Hedonic price estimations
Although there is no market for a water service to be evaluated, there
are other markets in which these benefits are embedded (for instance,
real property transactions near an water aesthetic place will somewhatncorporate t ese ene ts, a t oug un e w t ot er attr utes o t e
property).
This method is based on the assumption that the price of a marketed
good is a function of its different attributes, and an implicit price exist
for each of these.
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Contingent valuation methods
These methods have become verypopular to estimating the values ofwater related goods for which there are
to be created.
Since consumers do not have a clear
idea about the nature of the service,the researcher has to explain it veryclearly and ask questions regarding thewillingness to pay for these services.
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Valuation of water as intermediate good
Often water is not directly consumed but enters aproductive process like agriculture, industry orhydroelectric power generation.
marginal productivity.
When there is no market for the input, like for
water, special methods of valuation are needed: Hedonic price method (when a surrogate market can giveinformation on MVP of water);
Residual imputation approach and Alternative cost approach.
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Residual method for water valuation
Is the most-frequently used, particularly to irrigation water.
Uses a production function approach.
A total production function is estimated and the marginal
contribution of all relevant inputs (including water) are estimated
with production data and prices for the non-water inputs.
If these prices correctly reflect their scarcity (well working
markets), the remainder of total value is considered the
contribution of water to total value