Evaluation of Water Allocation Policies in China's Yellow River Basin

The goal of this study was to examine the consequences of surface-water allocation policies in the Yellow River basin. This goal was accomplished using a mathematical optimization model developed by the World Bank. The first objective was to assess the economic efficiency of the upper limits on the use of river water for irrigation and other purposes as established by the Chinese government. These limits were determined to be overly restrictive for some regions, resulting in significant economic losses unless revised to reflect the optimal uses of water. The second objective was to examine the economic implications of the current 'first come, first serve' water allocation policy. Results from model simulations suggest that water should be reallocated from upstream regions to lower regions in the basin in order to maximize the value added from water use. The third objective was to estimate the economic consequences of requiring farmers to pay fees based on the marginal costs of producing irrigation water in place of current fees, which are much lower. Results indicate that farmer income in the upper and middle reaches of the river would decline substantially if marginal cost pricing were introduced, and that the government's goal of regional self-sufficiency in food production might be jeopardized. The fourth objective was to estimate the economically efficient water prices that municipal and industrial (M&I) consumers should pay to maintain projected levels of consumption. Results show that current fees should more than double to reflect the foregone economic value to other water uses. Further, as with hydropower, the M&I sector would benefit significantly if irrigators were required to pay fees reflecting the marginal costs of water production.Master of Science in Environmental Engineerin