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Transcript of Water resource
Water resources are critical to human daily life, like air.
Water covers 71% of the Earth's surface
1. Water pricing
2. Investing in water supply system
- Most water supply systems are handled by publicly owned companies or private companies.
- A fundamental decision is how water is to be priced
- Pricing decisions are :
+ Undertaken with the objective of covering costs.
+ Related to decisions about expanding the capacity of existing systems
members of group 5
1. Nguyễn Ngọc Diệp
2. Nguyễn Hoài Thương
3. Nguyễn Diệu An
4. Đào Diệu Linh
5. Nguyễn Thị Thủy
6. Nguyễn Thị Mỹ Linh
7. Nguyễn Thị Vân Anh
Safe drinking water (Freshwarer) is essential to humans and other lifeforms
Water : not the endless resource like we thought.
1. Water pricing
1.1 Average cost pricing
1.2 Pricing with Diminishing Marginal Costs
2. Investing in water supply system
- Fundamental to the delivery of any good or service and its distribution among users is the way its price determined.
- In a market economy, buyers and sellers interact and trade, and out of this comes the prices of the items traded, which shift up or down through time as supply and demand factors change.
Investments to protect existing water supplies
Shifts from one type of water supply source to another
Investments in the existing system that increase system capacity
I. WATER RESOURCE
On Earth, 96.5% of the planet's water is found in seas and oceans.
Only 2.5% is freshwater
Group 5 - English of Natural Resources Economics
- Suppose that at the present time the water demand curve for the community in question is D1 and the price of water is currently p1, the quantity is q1.
- Suppose that this quantity q1 is also equal to the present capacity of the water system.
-> a balance situation with neither excess demand nor excess supply in the system.
- Suppose that in 10 years, the water demand curve is expected to be D2.
- If it does nothing and the new population materializes anyway, there will be excess demand at the old water price of p1.
- At that price, with demand curve D2, the quantity of water demanded is q2 (q2>q1)
- If the price were raised to p2, the excess demand could be wiped out.
- But in the real world any number of factors can upset this process.
+political in nature...
- If there are reasonable levels of competition among buyers and among sellers, well-definedproperty rights, and few important externalities, the established prices are efficient and the quantities traded are socially efficient.
Water is usually thought of as something special, with qualities that make it different from “normal” commodities.
One can get along without many goods, but one cannot get along without water for very long. Most people have few alternatives when it come to water; they either hook up the same system everybody else is on or go without. Nor is it possible to run a modern public sanitation system without copious amounts of water. All of these tend to give water a special status in the eyes of consumers and political authorities.
One implication of this is that, over the years, politicians and other public authorities have had a lot to say about how water has been priced. This obviously has had enormous implications for the way water has been used and for the demand for expansion of water supply systems.
+ Figure 15-1 shows a supply and demand curve for water for a community water supply system.
+ Note that the demand curve for water is drawn as downward-sloping to the right, just like any other good or service.
+ The efficient quantity of water is q1 - p1.
Suppose the price is established at MB=MC, a condition of efficiency. Then the water supply company will have revenues (area b) insufficient to cover costs ( area a + b).
How do we establish efficient pricing (p = MC) in conditions of declining marginal costs?
+ To institute
declining block pricing
– a higher price (that is, higher than p* in the figure) for the first quantity of water (some quantity less than q*), and then a price of p* at far higher consumption levels.
Assuming it is set at p* as in figure 15-2, is sufficient to assure efficiency at the margin, while the connection charges cover the cost overage that would otherwise occur.
Figure 15-1 is drawn with an increasing marginal cost curve, analogous to all of those shown in previous chapters dealing with other resources. The costs of a water system include the costs of conveyance systems and the costs of procuring the supplies of water, surface, or ground, that are delivered to consumers. As system are expanded, the need to reach out farther for additional supplies often implies a rising marginal cost curve.
There may be circumstances, however, where marginal costs actually go down. This may be the case, for example, in case of ample supplies and where relatively modest additions to the conveyance system are sufficient to provide substantially more capacity. This situation is depicted in figure 15-2
Expansions of the existing system
Among the general public, and especially among public administrators, the widespread belief is that the basic reason for having prices at all is to cover the cost of production.
For those in charge of water and other public utilities this leads to a cost-based pricing rule: set price so that revenues cover costs.
How to price the water ?
- These entities essential function as public utilities, These entities essential function as public utilities
Holding monopoly positions within communities
Subject to the oversight of public advisory boards or commission
-> The pricing ideas of these groups have usually determined the actual prices that water supply companies have set.
However, It's unlikely that water planners would countenance such an increase in water price
but the water utility or company would probably make sizable profits in that situation.
Not only would consumers have to pay much higher prices...
More than likely, the planners would think in terms of adding capacity to the system by investing in additional water supplies
In economic efficiency
Suppose this is horizontal, in other words the system can be expanded in such a way that the costs of dilivering the water are constant.
Then, indeed, the efficiency system increment is equal to q2 - q1, and the efficient price of water remains at p1
But suppose the long-run marginal costs of added capacity are upwardsloping, such as depicted in the curve labeled MC that goes through the original price-quantity combination p1, q1
=> If adding capacity becomes increasingly costly
With the MC curve as depicted in figure 15-3, the efficient course of action is to increase system capacity to q3 and raise the price to p3
+ So if the utility sets its price this way, it will run a profit, in appearance and fact. To avoid profits, therefore, utilities usually price below marginal cost, for example, something like p2 in the figure. By setting the price this way, it can find the point where TC (c + d + e + f +g) = TR (b + c + e), but the price p2 is not efficient -> there will be a discrepancy between marginal cost and marginal benefits; the latter will be below the former. The utility will produce some water for which the marginal valuation of consumers is lower than the marginal costs of production.
+ Suppose the water company charges this price. TC = c + d . But TR = a + b + c + d, which clearly exceeds the amount c + d.
Revenue should not fall short of costs, because they do, losses presumably have to be make up some other way. Nor should revenue exceed costs, because this implies profits, which are thought to be inappropriate for public enterprises. This type of reasoning has historically led to what is called average-cost pricing.
1. Average cost pricing
- Most domestic water in the US is supplied by public water supply companies
All these situations call for investment-type decisions, that is, decisions in which most of the costs occur today whereas most of the benefits are in terms of future consumption values