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Urban water management: optimal price and investment policy under climate variability

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  • Neal Hughes
  • Ahmed Hafi
  • Tim Goesch

Abstract

Australian urban water utilities face a significant challenge in designing appropriate demand management and supply augmentation policies in the presence of significant water scarcity and climate variability. This article considers the design of optimal demand management and supply augmentation policies for urban water. In particular, scarcity pricing is considered as a potential alternative to the predominant demand management policy of water restrictions. A stochastic dynamic programming model of an urban water market is developed based on data from the ACT region. Given a specification of the demand and supply for urban water state dependent optimal price and investment policies are estimated. The results illustrate how the optimal urban water price varies inversely with the prevailing storage level and how the optimal timing of investment differs significantly between rain dependent and rain independent augmentation options. Copyright 2009 The Authors. Journal compilation 2009 Australian Agricultural and Resource Economics Society Inc. and Blackwell Publishing Asia Pty Ltd.

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  • Neal Hughes & Ahmed Hafi & Tim Goesch, 2009. "Urban water management: optimal price and investment policy under climate variability ," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 53(2), pages 175-192, April.
    • Handle: RePEc:bla:ajarec:v:53:y:2009:i:2:p:175-192
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    File URL: http://hdl.handle.net/10.1111/j.1467-8489.2007.00446.x
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    1. Xayavong, Vilaphonh & Burton, Michael P. & White, Benedict, 2007. "Estimating Urban Residential Water-Demand with Increasing Block Prices: The Case of Perth, Western Australia," Working Papers 7061, University of Western Australia, School of Agricultural and Resource Economics.
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    8. Mark Hoffmann & Andrew Worthington & Helen Higgs, 2006. "Urban water demand with fixed volumetric charging in a large municipality: the case of Brisbane, Australia ," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 50(3), pages 347-359, September.
    9. David Hensher & Nina Shore & Kenneth Train, 2006. "Water Supply Security and Willingness to Pay to Avoid Drought Restrictions," The Economic Record, The Economic Society of Australia, vol. 82(256), pages 56-66, March.
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    11. Geoff Edwards, 2006. "Whose Values Count? Demand Management for Melbourne's Water," The Economic Record, The Economic Society of Australia, vol. 82(s1), pages 54-63, September.
    12. Hughes, Neal & Hafi, Ahmed & Goesch, Tim & Brownlowe, Nathan, 2008. "Urban water management: optimal price and investment policy under uncertainty," 2008 Conference (52nd), February 5-8, 2008, Canberra, Australia 6005, Australian Agricultural and Resource Economics Society.
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    Cited by:

    1. R. Quentin Grafton & Michael B. Ward, 2010. "Dynamically Efficient Urban Water Policy," Centre for Water Economics, Environment and Policy Papers 1013, Centre for Water Economics, Environment and Policy, Crawford School of Public Policy, The Australian National University.
    2. Joost R. Santos & Sheree T. Pagsuyoin & Lucia C. Herrera & Raymond R. Tan & Krista D. Yu, 2014. "Analysis of drought risk management strategies using dynamic inoperability input–output modeling and event tree analysis," Environment Systems and Decisions, Springer, vol. 34(4), pages 492-506, December.
    3. Marcos García-López & Borja Montano & Joaquín Melgarejo, 2020. "Water Pricing Policy as Tool to Induce Efficiency in Water Resources Management," IJERPH, MDPI, vol. 17(10), pages 1-19, May.
    4. Nan Lu & Jiwei Zhu & Hui Chi & Bing Wang & Lu Chen, 2021. "Progress Assessment and Spatial Heterogeneity Analysis of Water Conservancy Modernization Construction in China," Sustainability, MDPI, vol. 13(7), pages 1-19, March.
    5. V., Ernesto Guerra & H., Eugenio Bobenrieth & H., Juan Bobenrieth & Wright, Brian D., 2023. "Endogenous thresholds in energy prices: Modeling and empirical estimation," Energy Economics, Elsevier, vol. 121(C).
    6. John Freebairn, 2013. "Imperfect Knowledge and Urban Water Decisions," Economic Papers, The Economic Society of Australia, vol. 32(1), pages 32-40, March.
    7. Freebairn, John W., 2012. "Risk Aversion and Urban Water Decisions," 2012 Conference (56th), February 7-10, 2012, Fremantle, Australia 124206, Australian Agricultural and Resource Economics Society.
    8. Marcos García-López & Joaquín Melgarejo & Borja Montano, 2021. "The Financing of Wastewater Treatment and the Balance of Payments for Water Services: Evidence from Municipalities in the Region of Valencia," Sustainability, MDPI, vol. 13(11), pages 1-15, May.
    9. Adamson, David, 2010. "Climate change, Irrigation and Pests: Examining Heliothis in the Murray Darling Basin," Risk and Sustainable Management Group Working Papers 149879, University of Queensland, School of Economics.
    10. Harry Clarke, 2013. "Planning Urban Water Investments with an Uncertain Climate," Economic Papers, The Economic Society of Australia, vol. 32(4), pages 426-439, December.

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