Scarcity and Welfare: The Case of Water Resources

Abstract

The welfare gain from the tariffs that reflect water resource scarcity is analyzed. The empirical results of the welfare gain from the efficient management of groundwater extraction relative to myopic policy are summarized. It is shown that efficiency gain increases when the backstop resource becomes more expensive but changes ambiguously with an increase in the groundwater stock or discount rate that make estimates for different aquifers hardly comparable. Numerical analysis demonstrates that differentiated tariffs that reflect differences in water consumption patterns may bring substantial welfare gain.