Distributional Impacts of Water Allocation Policies for an Agricultural Watershed

Abstract

The study examined the short and long-run efficiency of current and alternative water allocation policies in Ontario. Information was gathered on water supply and the value of water for agricultural irrigation, domestic use and recreation/environmental purposes. A broad 10% reduction of all water takings under Ontario’s Low Water Response plan would cost the residents of the watershed approximately $1.63 million with the bulk of the cost borne by agriculture ($1.59 million). Targeting reductions to minimize costs lowers the total to less than $635,000. In the short-run, simulations showed the efficiency of current Ontario policy could be improved by specifying clear policy objectives in times of scarcity and targeting reductions to lower value uses. Simulations of alternative policies suggested maximum permitted volume fees and volumetric fees provided insufficient incentives to change water use in the short-run and only volumetric fees added incentives to invest in efficiency in the long-run. To achieve reductions in consumptive use in the short-run, volumetric fees would have to be very large and would add significant costs to users. Permit trading systems added significant incentives to allocate water to its most beneficial uses in the short-run and incentives for conservation in the long-run.