Continued -

In complement to Moroccan case

Using economic analysis Using economic analysis

to inform policyto inform policy--makingmaking18

Price elasticity of water demandPrice elasticity of water demand

� = how does demand react to price

� Ratio of variation rates. Observed demand variation divided by price variation

� If - 10 % of demand due to + 10 % of price, price elasticity ratio = - 0.1 / 0.1 = - 1

� If - 1 % of demand due to + 10 % of price ����, price elasticity ratio = - 0.1

� If demand is reduced by 20% due to a 10% price raise, price elasticity is - 2

19/

CostCost--Benefit analysisBenefit analysis

� For a given project

� Sum of costs over considered period

� Annual depreciation of capital

� Operating expenditures

� Financial costs

� Opportunity costs

� Environmental costs

� Sum of benefits (= values) over considered period

� Economic benefits: outputs & economic impacts to the economy

� Environmental benefits: value of enhanced / preserved environmental services

20/

How account for different chronological How account for different chronological

profiles?profiles?

Costs

+

-

time

Benefits

Costs

+

-

time

Benefits

Project A

Project B

Solution: discountingSolution: discounting

Costs

+

-

time

Benefits

Costs

+

-

time

Benefits

Project

A

Project

B

Reducing future values

Proportionally to how far we are from their occurrence (“year from now”, “y”)

Based on current interest rates (“i ")

Sum of discounted values = “Net Present Value”(see excel formula)

Valuing ecosystem servicesValuing ecosystem services

Eco. Functions Use - Service

Replace

Replacement cost Sustain and loose

Cost of damages

Mitigate (protect from

consequences)

Protection cost

2 balances of costs and prices2 balances of costs and prices

24

Capital

charges

Operating and maintenance

Economic

externalities

Environmental

externalities

Opportunity costs

Water billStrict balance

Water

charges,

taxes, …

Large balance

Assessing the recovery of costs Assessing the recovery of costs

by corresponding pricesby corresponding prices25/ Costs

Capital

charges

Operating and maintenance

Economic

externalities

Environmental

externalities

Opportunity costs

Price paid (example)

Environmental taxes

Water bill

Other water

charges

Subsidies

External costs

Opportunity costs

Residual costs Borne by…

Environment and its users

The other activities

The tax-payers

The user of water service

The user of water service

The user of water service

Paid by…