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The Cost of Covering Costs: A Nationwide Model for Water Pricing

Author

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  • A. Reznik

    (Department of Environmental Economics and Management, The Hebrew University of Jerusalem, Jerusalem, PO Box 12, Rehovot 76100, Isreal)

  • E. Feinerman

    (Department of Environmental Economics and Management, The Hebrew University of Jerusalem, Jerusalem, PO Box 12, Rehovot 76100, Isreal)

  • I. Finkelshtain

    (Department of Environmental Economics and Management, The Hebrew University of Jerusalem, Jerusalem, PO Box 12, Rehovot 76100, Isreal)

  • I. Kan

    (Department of Environmental Economics and Management, The Hebrew University of Jerusalem, Jerusalem, PO Box 12, Rehovot 76100, Isreal)

  • F. Fisher

    (#x2020;Department of Economics, Massachusetts Institute of Technology, 50 Memorial Drive, Cambridge, MA 02142-1347, USA)

  • A. Huber-Lee

    (#x2021;Stockholm Environment Institute, 11 Curtis Ave., Somerville, MA 02144-1224, USA)

  • B. Joyce

    (#x2021;Stockholm Environment Institute, 11 Curtis Ave., Somerville, MA 02144-1224, USA)

Abstract

This study offers a high-resolution model of nationwide water supply. The model is sufficiently detailed to represent all main water sources in an economy, the principal segments of the conveyance system, urban, industrial and agricultural demand regions, and various water types, including fresh, saline and recycled. Calibrated for Israeli 2010 data, we find that the optimal extraction of fresh water is only 2% larger than the total observed supply from those sources. However, for some specific sources, the deviation between optimal and observed quantities is significant. Assuming average constant recharge, the optimal aggregated desalination is 57% of the 2010 desalination capacity and only 33% of the present desalination capacity. Even with an assumed 40% decline in recharge (for example, due to climate change), the model uses only 50% of the present desalination capacity. This may suggest that the construction of desalination facilities in Israel, which began in 2005, could have been delayed. The model establishes a comprehensive system of pumping levies and user fees that support the optimal allocation. However, due to considerable scale economies, the average cost is almost 50% larger than the marginal cost. The implications are that the welfare cost of the recent Israeli Balanced Budget Water Economy legislation is more than 100 million USD per year, about 10% of the water economy share of the GDP.

Suggested Citation

  • A. Reznik & E. Feinerman & I. Finkelshtain & I. Kan & F. Fisher & A. Huber-Lee & B. Joyce, 2016. "The Cost of Covering Costs: A Nationwide Model for Water Pricing," Water Economics and Policy (WEP), World Scientific Publishing Co. Pte. Ltd., vol. 2(04), pages 1-39, December.
    • Handle: RePEc:wsi:wepxxx:v:02:y:2016:i:04:n:s2382624x16500247
    DOI: 10.1142/S2382624X16500247
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    References listed on IDEAS

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    1. Reznik, Ami & Feinerman, Eli & Finkelshtain, Israel & Fisher, Franklin & Huber-Lee, Annette & Joyce, Brian & Kan, Iddo, 2017. "Economic implications of agricultural reuse of treated wastewater in Israel: A statewide long-term perspective," Ecological Economics, Elsevier, vol. 135(C), pages 222-233.
    2. Baumol, William J, 1977. "On the Proper Cost Tests for Natural Monopoly in a Multiproduct Industry," American Economic Review, American Economic Association, vol. 67(5), pages 809-822, December.
    3. Rosegrant, M. W. & Ringler, C. & McKinney, D. C. & Cai, X. & Keller, A. & Donoso, G., 2000. "Integrated economic-hydrologic water modeling at the basin scale: the Maipo river basin," Agricultural Economics, Blackwell, vol. 24(1), pages 33-46, December.
    4. Finkelshtain, Israel & Kislev, Yoav, 1997. "Prices versus Quantities: The Political Perspective," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 83-100, February.
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    Cited by:

    1. Elham Erfanian & Alan R. Collins, 2018. "Charges for Water and Access: What Explains the Differences Among West Virginian Municipalities?," Water Economics and Policy (WEP), World Scientific Publishing Co. Pte. Ltd., vol. 4(04), pages 1-27, October.
    2. Israel Finkelshtain & Iddo Kan & Mickey Rapaport‐Rom, 2020. "Substitutability of Freshwater and Non‐Freshwater Sources in Irrigation: an Econometric Analysis," American Journal of Agricultural Economics, John Wiley & Sons, vol. 102(4), pages 1105-1134, August.
    3. Yerushalmi, Erez, 2018. "Using Water Allocation in Israel as a Proxy for Imputing the Value of Agricultural Amenities," Ecological Economics, Elsevier, vol. 149(C), pages 12-20.
    4. Yiğit Sağlam, 2019. "Welfare Implications of Water Scarcity: Higher Prices of Desalination," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 73(4), pages 995-1022, August.
    5. Bar-Nahum, Ziv & Reznik, Ami & Finkelshtain, Israel & Kan, Iddo, 2022. "Centralized water management under lobbying: Economic analysis of desalination in Israel," Ecological Economics, Elsevier, vol. 193(C).

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