Can Water Price Improve Water Productivity? A Water-Economic-Model-Based Study in Heihe River Basin, China

Abstract

Water demand management through price and market mechanisms is crucial for agricultural water management. However, how to set an appropriate agricultural water price remains unclear due to the uncertainty regarding the response of water demand to price changes and the complexity of the hydro-economic system. Thus, this study developed a water-economic model to examine both issues in the Heihe River Basin. The empirical results revealed that the basin’s agricultural water is currently price-inelastic, with a value of −0.26, but that at 0.27 yuan/m3, elasticity is gained. At this tipping point, water demand and economic output decline by up to 10.2% and 1.6%, respectively, while water productivity increases by 7.2%. It is noteworthy that the reallocation of water and land resources from agricultural sectors to non-agricultural sectors facilitated by a water price change is the main contributor towards water productivity improvement. This signifies the importance of managing water and land resources in an integrated framework to improve water productivity in the future. Our study contributes to the literature by suggesting that future policies for water-demand management should consider pricing that encourages water saving and the reallocation of water resources to high-value uses in order to increase water productivity.