01 Water Sector

8/12/2019 01 Water Sector

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Water valuation methods and economicinstruments

To know about main water valuation

methods for supporting the use of

economic instruments.

To be able to evaluate the pros and

cons of using specific water valuation

methods in different water situations.


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Outline

A cost benefit-analysis framework

Supply and demand

Main approach: full cost recovery

Description of main water valuation methods


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Introduction

Economic instruments are important for water management,

especially when there are notorious supply-demand imbalances and

misallocations.

As markets are seldom available for solving these problems, water

authorities will decide about levels and features of water tariffs in

order to influence behaviour and allocations.

In deciding about this, information is required regarding how users

value different water services.


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Multi-sector use and water valuation


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Importance of cost-benefit analysis

To reallocate water among

alternative uses or type of users;

To expand water infrastructure;

These decisions will

generate potential benefits

To improve the quality of water;

To expand the water service to

include sanitation and wastewater

treatment;

To include water management

actions at the basin level (very

important for IWRM);

ut a so costs or water

stakeholders

The main objective of cost-

benefit analysis is to

appropriately measure and

attribute these benefits and

costs.


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Water valuation and economic instruments

Even if a market is not in place for water service, demand andWTP exist and reflect how much are the water services valuedby users.

in the process of generating the benefits.

Challenge for valuation methods is how to measure benefitsof water services given situations in which there are not

observable markets or prices for those.

Equally important are correct estimation of costs andappropriate levels of tariffs to be charged directly to mainbeneficiaries.


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Demand function and residential use (1)

Close to be a private good but under monopolistic provision

Demand can be estimated looking at consumer behaviour and tariffchanges:

Qw = Qw(Pw,Pa,P;Y;Z)

where

Qw: the individuals level of consumption of water in a specifiedtime period;

Pw: price of water;

Pa: price of an alternative water source;

P : average price index representing all other goods and services;

Y : consumers income, and

Z : vector representing other factors, such as climate andconsumer preferences.


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Demand is estimated using econometric methods applied to

data from water use, tariffs and local and users attributes.

Demand function and residential use (2)

When this type of data is not available (or for new projects),

hedonic price methods and contingent valuation methods are

also used


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Hedonic price estimations

Although there is no market for a water service to be evaluated, there

are other markets in which these benefits are embedded (for instance,

real property transactions near an water aesthetic place will somewhatncorporate t ese ene ts, a t oug un e w t ot er attr utes o t e

property).

This method is based on the assumption that the price of a marketed

good is a function of its different attributes, and an implicit price exist

for each of these.


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Contingent valuation methods

These methods have become verypopular to estimating the values ofwater related goods for which there are

to be created.

Since consumers do not have a clear

idea about the nature of the service,the researcher has to explain it veryclearly and ask questions regarding thewillingness to pay for these services.


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Valuation of water as intermediate good

Often water is not directly consumed but enters aproductive process like agriculture, industry orhydroelectric power generation.

marginal productivity.

When there is no market for the input, like for

water, special methods of valuation are needed: Hedonic price method (when a surrogate market can giveinformation on MVP of water);

Residual imputation approach and Alternative cost approach.


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Residual method for water valuation

Is the most-frequently used, particularly to irrigation water.

Uses a production function approach.

A total production function is estimated and the marginal

contribution of all relevant inputs (including water) are estimated

with production data and prices for the non-water inputs.

If these prices correctly reflect their scarcity (well working

markets), the remainder of total value is considered the

contribution of water to total value

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01 Water Sector