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The Economics of The Economics of Water for Environmental FlowsWater for Environmental Flows
Mitchell MathisMitchell Mathis
Houston Advanced Research CenterHouston Advanced Research Center
Presentation for the Science Advisory Committee Presentation for the Science Advisory Committee to the to the
Study Commission on Water for Environmental FlowsStudy Commission on Water for Environmental Flows
June 18, 2004June 18, 2004
OverviewOverview
What is economics?What is economics? What is economic value?What is economic value? Economics and waterEconomics and water Economic value of environmental Economic value of environmental
flowsflows Economics and the allocation of Economics and the allocation of
water for environmental flowswater for environmental flows
What is Economics?What is Economics?
What is Economics?What is Economics?
What is Economics?What is Economics?
The study of scarcity, choices, and The study of scarcity, choices, and tradeoffs?tradeoffs?
The study of production and consumption?The study of production and consumption?
The study of markets?The study of markets?
The study of how to use resources in a The study of how to use resources in a way that produces the most benefits?way that produces the most benefits?
The study of human welfare?The study of human welfare?
What is Economics?What is Economics?
Consumers Firms
Individual economic behavior
Markets
The economy as a whole
Macroeconomics
Microeconomics
Inflation
GNP Interest rates
Unemployment
FederalReserve
What is Economics?What is Economics?
Positive: “What is”Positive: “What is”
Normative: “What should be”Normative: “What should be”
Objective: Utilize resources in a way that maximizes benefits
“Efficiency”
What is economic value?What is economic value?
Marginal Costs (Supply)
Marginal Benefits (Demand)
Quantity
$
Quantity*
Price*
Consumer Surplus
Producer Surplus
Economics and WaterEconomics and Water
Water usersWater users Water demandWater demand Water supplyWater supply Allocation across competing usesAllocation across competing uses The importance of economic valueThe importance of economic value
Humans Water
Municipal Agricultural Industrial
Ecosystem
The Cost of WaterThe Cost of Water
subsidy
marginal costmarginal
benefits (demand) with infrastructure subsidy
with infrastructure subsidy and no charge for raw water
Price paid for water rarely reflects scarcity, economic value
=>
Water DemandWater Demand
Relates quantity demanded to price paidRelates quantity demanded to price paid Demand reflects willingness to pay/marginal benefits (a Demand reflects willingness to pay/marginal benefits (a
source of economic value)source of economic value) For many water uses marginal benefits (demand) are not For many water uses marginal benefits (demand) are not
well understood, especially environmental useswell understood, especially environmental uses
Municipal Agricultural Industrial Environmental
$
Q
$
Q
$
Q
$
Q
Water DemandWater Demand
Municipal Agricultural Industrial Environmental
$
Q
$
Q
$
Q
$
Q
$
Q
Total Demand
Without demand for environmental flows
supply
Decision-Making: Optimal Decision-Making: Optimal AllocationAllocation
Municipal Agricultural Industrial Environmental
$
Q
$
Q
$
Q
$
Q
Environmental
Industrial
Agricultural
Municipal
Industrial
Agricultural
Municipal
Optimal
Maximizes total benefits
Sub-Optimal
Does NOT maximize total benefits
Decision-Making:Decision-Making:Weighing Cost and BenefitsWeighing Cost and Benefits
Net Benefits = Benefits - Costs
Environmental Flows
Decision-Making:Decision-Making:Weighing Cost and BenefitsWeighing Cost and Benefits
Net Benefits = Benefits - Costs
Environmental Flows
Decision-Making:Decision-Making:Weighing Cost and BenefitsWeighing Cost and Benefits
Net Benefits = Benefits - Costs
Environmental Flows
Economic Value of WaterEconomic Value of Water($ per acre-foot)($ per acre-foot)
Use Average Median Minimum Maximum No. of Values
InstreamInstream
Recreation/Fish and WildlifeRecreation/Fish and Wildlife Habitat MaintenanceHabitat Maintenance 4848 55 00 2,6422,642 211211
Waste DisposalWaste Disposal 33 11 00 1212 2323
NavigationNavigation 146146 1010 00 483483 77
HydropowerHydropower 2525 2121 11 113113 5757
WithdrawalWithdrawal
IrrigationIrrigation 7575 4040 00 1,2281,228 177177
Industrial ProcessingIndustrial Processing 282282 132132 2828 802802 77
DomesticDomestic 194194 9797 3737 573573 66
Source: Source: Frederick (1997)Frederick (1997)
Water and Ecosystem Water and Ecosystem ServicesServices
Water sustains ecosystemWater sustains ecosystem Ecosystem provides valuable servicesEcosystem provides valuable services
As raw material and intermediate inputs to firmsAs raw material and intermediate inputs to firms Directly to consumersDirectly to consumers
Value of water derives from its contribution to the value of Value of water derives from its contribution to the value of ecosystem servicesecosystem services
Humans Water
Municipal Agricultural Industrial
Ecosystem
Value of Environmental Flows in Value of Environmental Flows in ProductionProduction
Instream Flows
Recreation AestheticsEnvironment
Use Values
(indirectly through benefits of ecosystem services)
Firms
$$$The Market
Ecosystem Service
Valuation Approach:
Productivity Method(net factor income, derived value)
Value of Environmental Value of Environmental FlowsFlows
Instream Flows
Recreation AestheticsEnvironment
Use Values
(indirectly through benefits of ecosystem services)
Firms
$$$The Market
Shrimp
Value derived from:
• market price of shrimp
• production process of the firm
• relationship of water to shrimp
River
Allocation
Agriculture
Communities
Valley Economy
Eco-tourism
Environment Manufacturing
WATER USE IN THE LOWER RIO GRANDE VALLEY
LowerRio Grande River
What’s left over
Value of Environmental Value of Environmental FlowsFlows
Instream Flows
Recreation AestheticsEnvironment
Use Values
(indirectly through benefits of ecosystem services)
Consumers
Habitat maintenance
Waterfoul hunting
Fishing
Recreation and nature appreciation opportunities
Other ecosystem services
Valuation Approaches seek to estimated “willingness to pay”
• hedonic pricing
• travel cost
• contingent valuation
Value of Environmental Value of Environmental FlowsFlows
Instream Flows
Recreation AestheticsEnvironment
Non-use Values
ConsumersValuation approach:Contingent Valuation
Water to Sustain the Water to Sustain the Ecosystem:Ecosystem:
A “Public Good”?A “Public Good”? What is a public good?What is a public good?
Optimal provision and the “free rider” Optimal provision and the “free rider” concernconcern
Excludability
Subtractability
low
low
high
high Private goods
Public Good
Open Access
Resource
Club Goods
QuestionsQuestions
??
