Water pricing

The water prices that implement the optimal water policy are derived. These prices contain the supply cost components and two shadow price terms: one reflecting the in situ value of natural water and the other representing the scarcity of recycled water. The former accounts for the scarcity, extraction cost and instream value of natural water, and has a pronounced effect on the onset and extent of desalination along the optimal policy. The latter accounts for the scarcity of recycled water, stemming from the limit imposed on its supply by the sewage discharge, and acts as a tax on users of recycled water and as a subsidy for domestic and industrial users that contribute to the supply of recycled water (via the sewage they discharge). Special attention is given to implications of the public good role of environmental water allocation. An example based on Israel’s water economy is presented