A Simple Method of Water Valuation for Climate Planning

Abstract

Economic analysis has considerable power to guide a number of water development proposals to inform climate adaptation planning.  Much work has appeared in recent years on valuing water resources to support that planning, but little theoretically rigorous analysis exists on valuing resources in over a wide range of physical and economic conditions in a general equilibrium setting.   Moreover, no published work to date has solved the inverse problem of inferring the parameters of a system of water production functions when observed data are constrained by a single observation.  This paper addresses an important inverse problem in water economics, namely the process of inferring from a single observation on land and water use the parameters of the underlying production functions. It solves an inverse problem by going from data on observed factor use, factor prices, commodity production, and commodity prices to the underlying production function parameters.  From the recovered production function parameters, marginal values of water are calculated over a wide range of water supply and economic conditions.   An example is illustrated for land and water development planning in the American Southwest.  This paper’s original contribution can inform policy debates internationally over competing proposals for climate adaptation planning.