Welfare Implications of Water Scarcity: Higher Prices of Desalination

Yiğit Sağlam ()
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Yiğit Sağlam: Victoria University of Wellington

Environmental & Resource Economics, 2019, vol. 73, issue 4, No 3, 995-1022

Abstract: Abstract In this paper, we evaluate the welfare implications of shortages in renewable resources, and investigate the effects of cross-subsidization on these shortages. We set up a stochastic dynamic programming model in which a benevolent supplier allocates the resource for multiple user groups subject to revenue and resource constraints. The supplier also has access to an external source that can be utilized at a certain cost. The solution to the model gives the “optimal” sectoral prices, and demand for the external source. We find out that saving budget surplus during periods of scarcity allows the planner to charge prices below average costs when the resource is abundant. Using data from Turkey, we simulate our dynamic model to quantify the implications of cross-subsidization on water use across user groups.

Keywords: Renewable resource; Water shortages; Stochastic dynamic programming; Desalination; Cross-subsidization (search for similar items in EconPapers)
JEL-codes: D12 H21 Q15 Q25 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1007/s10640-018-0284-2

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