We investigate the effect of introducing a fiscally neutral increasing block rate water budget price structure on residential water demand. We estimate that demand was reduced by around 17%, although the reduction was achieved gradually over more than three years. As intermediate steps we derive estimates of price and income elasticities that rely only on longitudinal variability. We investigate how different subpopulations responded to the pricing change and find evidence that marginal, rather than average, prices may be driving consumption. We also derive alternative rate structures that might have been implemented, and assess their estimated demand effects. Key wordsBlock rate pricing, DCC model, residential water demand, water budgets. 1 Increasing Block Rate Water BudgetsAs urban water utilities confront increasingly scarce and less reliable water supplies due to population growth, environmental regulation, and climate variability, water managers are seeking opportunities to reduce residential water demand. While the adoption of non-price instruments (e.g., short-term water restrictions, subsidies for water-saving technologies, and public-awareness campaigns) likely will continue to be wide-spread, volumetric pricing and, in particular, block-rate pricing is gaining traction. This is not surprising to economists who have long espoused the merits of pricing as an efficient and effective means to address water scarcity (e.g., Howe and Linaweaver 1967;Chesnutt and Beecher 1998;Renwick and Green 2000;Griffin 2001;Dalhuisen et al. 2003;Olmstead and Stavins 2009;Grafton et al. 2011). One challenge confronting water utilities that are considering switching to volumetric pricing is identifying the particular rate structure that is best suited to their needs. One structure that is increasingly being adopted by California water utilities is the increasing block-rate water budget.Increasing block rate (IBR) water budgets (which we refer to herein more simply as "water budgets") are a particular type of escalating tiered price structure in which the block sizes are based on household-specific characteristics (e.g., household size, irrigated area), environmental conditions (e.g., evapotranspiration), and a judgment by the water utility with regard to what constitutes "efficient" water use given those characteristics and conditions. This means that price structures can differ across households at any given time, and through time for any given household. Water budgets are a relatively new pricing tool. One of the earliest adopters was the Irvine Ranch Water District (IRWD) in southern California which instituted such pricing in the early 1990s (IRWD 2013).Water budgets are thought to have significant advantages over more commonly used rate structures.1 Foremost, water budgets provide utilities with the means to promote conservation through appropriate price signals while also maintaining fiscal balance. Under water budget pricing, each 1 We thank an anonymous reviewer for helping to improve this section. introdu...
[1] With increasing urban, industrial, and agricultural water demand and projected reduced supply under climate change, allocations to the environment are critically low in many arid and semiarid basins. Consequently, many governments are striving to augment environmental flows, often through market-oriented mechanisms that involve compensating irrigated agriculture, the largest water user in most basins, for reducing diversions. A widely documented challenge with policies to recover water for the environment arises because part of the water diversion reduction can form the basis for downstream consumptive water rights or environmental flows. This article gives an empirical comparison of two incentive policies to acquire water for environmental flows for a part of the Murray-Darling Basin (MDB), Australia. One policy consists of paying irrigators and water delivery firms to make capital and management investments that improve on-farm irrigation and water-conveyance; the other policy consists of having the government buy water from irrigators on the active MDB water market. The results show that the first option results in relatively larger return flow reduction, while the second option tends to induce significant irrigated land retirement with relatively large reductions in consumptive use and small reductions in return flow. In cases where irrigation losses result in little useful return flow (e.g., evaporative loss reduction or during drought in some instances), efficiency-improving investments may provide some cost-effective opportunities. Where a large portion of loss forms valuable return flow, it is difficult to make a case for the cost-effectiveness of policies involving payments for investments in irrigation and conveyance system upgrades.
Salinity and drainage management options include source control, reuse, and evaporation ponds. This article identifies efficient strategies to maintain hydrologic balance in closed drainage basins and evaluates their impact on regional agricultural profits. Theoretical analysis suggests that economic efficiency requires acknowledgment of the nonseparability between water use and land value. Empirically, our solution involves a modest amount of source control, a substantial amount of reuse, and the elimination of evaporation ponds often associated with large environmental damages, while maintaining grower income. Various policy instruments and options are introduced and discussed, including a system of drainwater charges, marketable permits, and land retirement.
This article evaluates irrigated agriculture sector response and resultant economic impacts of climate change for a part of the Murray Darling Basin in Australia. A water balance model is used to predict reduced basin inflows for mild, moderate and severe climate change scenarios involving 1, 2 and 4°C warming, and predict 13, 38 and 63% reduced inflows. Impact on irrigated agricultural production and profitability are estimated with a mathematical programming model using a two-stage approach that simultaneously estimates short and long-run adjustments. The model accounts for a range of adaptive responses including: deficit irrigation, temporarily following of some areas, permanently reducing the irrigated area and changing the mix of crops. The results suggest that relatively low cost adaptation strategies are available for a moderate reduction in water availability and thus costs of such a reduction are likely to be relatively small. In more severe climate change scenarios greater costs are estimated. Adaptations predicted include a reduction in total area irrigated and investments in efficient irrigation. A shift away from perennial to annual crops is also predicted as the latter can be managed more profitably when water allocations in some years are very low.
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