The economics of urban water policy : infrastructure, scarcity, and conservation

This research focuses on urban water policy. The three papers extend the literature through economic application, taking theory in a direction that informs water resource managers on optimal decision-making or a better approach to management. Three primary results are: first, that the optimal infrastructure investment path is impacted by existing capital stock, water policy, and the size of the customer base served. Second, optimally managed, optimally priced urban groundwater mitigates aquifer drawdown and generates excess revenue that may be used for capital investment. Third, to achieve water conservation through non-price methods, managers should use a neighborhood, community-organized approach. Water systems across the United States need money for infrastructure repair and replacement. Utility level investment needs are grounded in existing infrastructure that is nearing the end of its economic life in a time of unparalleled population growth, suggesting that optimal investment should reflect the same. Chapter 2 presents a model that develops the optimal investment decision and uses two-stage least squares to test it. Consistent with model predictions, the empirical results show how the effects of population, capital, and existing policy influence infrastructure investment. The estimates indicate that per capita stock has a lagged impact on per capita investment and that increasing new customer connection costs reduces investment need more than increasing water rates to existing customers. Western U.S. water supplies are increasingly scarce due to, among other things, population growth and climate change. These two realities imply that increased scarcity may lead to over-consumption, premature resource exhaustion, and shortages. Chapter 3 develops a hydro-economic model of social welfare maximization constrained by water availability. The model provides optimal water use and the efficient price. A dynamic simulation model suggests that, for Albuquerque, New Mexico, current water prices are 20 percent of the price level that includes scarcity value. Investing the scarcity value in water infrastructure is one way to overcome regulatory pricing barriers and allocate water efficiently thus solving two problems with a single policy-prescription. Scarcity requires residents of arid, heavily populated regions of the U.S. to increase water conservation or face the consequence of shortfalls. As an impure public good, conserved water is subject to free-riding behavior. Chapter 4 considers a demand side, non-price management alternative to promote water conservation. Using experimental economics, this paper explores the extent to which community interaction impacts consumption. In a context rich, induced value environment participants are asked to allocate water between their group\u27s public source and private use. Three treatments vary group size, information, and communication to simulate actions a water manager could take to promote conservation. The results show that small group size and communication promote conservation, but the role of information is mixed