Abstract for: Estimating Impacts of Water Scarcity Pricing
Water resources in Western U.S. are increasingly scarce due to population growth and climate change that reduces water supplies. The collision of these two realities implies that if water remains under- priced, a likely externality is over consumption, premature resource exhaustion, and shortages. This paper develops a hybrid, hydro-economic model of social welfare maximization constrained by groundwater availability in a control theory framework. The model provides optimal water use and the efficient price given consumer preferences and resource constraints. The model suggest that water prices should be at least 23 to 36 percent above current levels. We consider one way to overcome the historical, institutional barriers to scarcity pricing by distributing back to consumers the scarcity value collected. Estimates of U.S. water infrastructure investment needs reach as much as $2.2 trillion dollars over the next 30 years. Investing the scarcity value in water infrastructure is one way to distribute excess revenue to consumers while allocating water efficiently, essentially solving two problems with a single policy prescription. We simulate the model's effectiveness and identify impacts using data from Albuquerque, New Mexico.