Using Economic Loss Functions to Value urban water scarcity in California

Abstract

Drought and dwindling supplies coupled with a growing population are severely straining California's water resources, and traditional water supply planning and analysis are proving inadequate to help the state prepare for future needs. To help ascertain the value of urban water use in California, one alternative has been the development of economic loss functions, which represent a flexible yet rigorous method to replace yield, shortage, and requirements‐based approaches to assessing water supply performance for planning studies, regulatory impact assessments, and other evaluations. The approach in this article applied residential water demand elasticities for residential willingness‐to‐pay for water, used an industry study for industrial willingness‐to‐pay for water, and assumed fixed commercial sector water use for 2020 population levels. On the basis of economic loss functions described in this article, urban water scarcity in California in 2020 would cost end users an estimated average of $1.6 billion per year, given current operations, allocations, and infrastructure.