From the perspective of water supply managers, supply reliability can be more important than economic benefit. This study uses four alternative models of water supply allocation to examine issues of reliability and welfare maximization arising from short-run inter-city water transfers. The results of this work show that the economic gain from water transfers may be relatively small. However, water transfers can significantly improve system reliability, thus providing strong incentives for transfer arrangements among water authorities. We apply the models in a case study on the island of Cyprus.
INTRODUCTIONDomestic water supply authorities are fundamentally concerned with the problem of reliability, providing for the water needs of their customers with a high degree of certainty [Moreau, 1987]. While supply reliability can be improved by developing new sources, such supplies take time to plan, permit, and construct so that the available supply is essentially fixed in the short run. As an alternative, short-run supply deficits can be met through supply transfers between neighboring water authorities. Cities may be able to arrange with other cities to buy short-run supplies and in doing so achieve both economic and system reliability benefits.We aim in this paper to show the gains resulting from intercity water transfers in the short run, where the "short run" is defined as the period in which raw water supply capacity is fixed. We measure these gains in two ways: increases in social welfare defined as net willingness-to-pay and increases in supply reliability. To achieve this aim, we have extended previous research on water transfers [Flinn and Guise, 1970; Vaux and Howitt, 1984; Marin and Smith, 1988] in two ways. First, we incorporate uncertainty. Second, after adding uncertainty, we model water transfers using more realistic assumptions about the behavior of water supply authorities. In particular, we assume that (1) water supply managers do not change prices to their own customers in response to supply conditions, especially shortage conditions and (2) they charge what they can get when selling water, that is they maximize net revenues from sales to other water authorities.We present three models of bilateral transactions between domestic supply authorities and a fourth model where no transfers take place. The first is a deterministic model which maximizes social welfare defined as net willingness-to-pay [Just et al., 1982]. This model reflects the deterministic, perfect market assumptions of earlier studies [Vaux and Howitt, 1984]. The second model is a normative economic model of efficient allocation under uncertainty. The objective of this model, as with the first, is to maximize social welfare. In this case it is expected social welfare because of the introduction of uncertainty. This model represents the best one can do under uncertainty. The third model, in contrast to the two previous models, is a net revenue maximization model reflecting the self-interest of the water authorities. The first and third m...