Economic value of water in the manufacturing industry located in the Valley of Mexico Basin, Mexico

Abstract

Abstract Water is one of the most important inputs in the production process, especially for the manufacturing sector. However, at the same time, this resource can present shortage problems, mainly due to a lack of knowledge about its value. In most emerging countries, the monetary value of water used in the production process does not necessarily reflect that there is a shortage, or the costs of catchment and treatment. Thus, the real cost of water is not paid. In addition, it is vital that the various manufacturing industries consider the opportunity cost, or shadow price, of consuming water for its production processes. Therefore, this paper estimates the economic value of water (EVW) for the manufacturing industry in a water basin with shortage problems (Valley of Mexico Basin (VMB), Mexico). This is understood as the shadow price, using the concept of production elasticity with respect to water input (eW) and the value of the marginal product (ρW). To that end, we used information from 69,984 economic units surveyed in 2013, and considered one type of production function, i.e., translog. The eW was estimated at 0.061 and the ρW at US $ 19.4/m3. The ρW ranged from US $ 2.3/m3 for the wood sector to US $ 20.1/m3 for the beverage and tobacco sector, demonstrating variation in ρW by sector. The results have important implications for several areas of industrial water management, especially for water basins where this resource presents shortage problems. Any investment in new industrial water supply projects requires information on the industrial EVW. That information is also needed in order to determine how to efficiently distribute scarce water resources across sectors.