Abstract
This study simulates the economy-wide effects of introducing new water pricing systems in Israel. A Computable General Equilibrium (CGE) model, STAGE_W, is used that includes multiple water commodities produced from different water resources. The current water pricing scheme supplies potable water to municipalities at fees above the supply costs and subsidizes water delivered to the agricultural and the manufacturing sectors. Due to limited freshwater resources, climate change and population growth, water scarcity is an increasing problem in Israel. Therefore, pricing systems which lead to a more efficient allocation of water are intensely debated. This study analyzes two alternative pricing schemes under discussion in Israel: price liberalization, which unifies the prices for all potable water consumers at cost recovery rates, and marginal pricing that lifts the potable water price to the cost of desalination. Both schemes reduce water demand with limited economic costs. Price liberalization is the more favourable option from a national welfare perspective, while marginal pricing allows for larger water savings and, in the long run, independence from fresh water resources.
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Notes
Municipalities include the service sector and households.
In this paper, the term marginal water refers to reclaimed wastewater and brackish water.
This is an activity which produces a certain water commodity from a water resource or by-product with the help of labour, capital (value added) and intermediate inputs.
Measured from the expenditure side.
It should be noted that welfare benefits resulting from positive externalities due to lower fresh water consumption (e.g. positive environmental effects or economic benefits for future generations) are not taken into account in the EV.
A simulation in which desalination capacity is fixed at the current level, such that the reduction occurs to the usage of fresh water resources, yields very similar results in terms of water usage and production. Due to the higher costs of desalination, which is subsidized, the change in real GDP turns negative (−0.01 %). The equivalent variation is slightly more negative, but income distribution more balanced.
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Acknowledgments
The authors thank the German Research Foundation (DFG) for partial funding of this research and two anonymous referees for their constructive comments which substantially improved the quality of the paper.
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Appendices
Appendix 1
Production system for activities in STAGE_W. Source: modified from Luckmann et al. 2014
Appendix 2
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Luckmann, J., Flaig, D., Grethe, H. et al. Modelling Sectorally Differentiated Water Prices - Water Preservation and Welfare Gains Through Price Reform?. Water Resour Manage 30, 2327–2342 (2016). https://doi.org/10.1007/s11269-015-1204-7
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DOI: https://doi.org/10.1007/s11269-015-1204-7