Modelling Sectorally Differentiated Water Prices - Water Preservation and Welfare Gains Through Price Reform?

Abstract

This study simulates the economy-wide effects of introducing new water pricing systems in Israel. A Computable General Equilibrium (CGE) model, STAGE_W, is used that includes multiple water commodities produced from different water resources. The current water pricing scheme supplies potable water to municipalities at fees above the supply costs and subsidizes water delivered to the agricultural and the manufacturing sectors. Due to limited freshwater resources, climate change and population growth, water scarcity is an increasing problem in Israel. Therefore, pricing systems which lead to a more efficient allocation of water are intensely debated. This study analyzes two alternative pricing schemes under discussion in Israel: price liberalization, which unifies the prices for all potable water consumers at cost recovery rates, and marginal pricing that lifts the potable water price to the cost of desalination. Both schemes reduce water demand with limited economic costs. Price liberalization is the more favourable option from a national welfare perspective, while marginal pricing allows for larger water savings and, in the long run, independence from fresh water resources.