Water Allocation Between the Agricultural and the Municipal Sectors Under Scarcity: A Financial Approach Analysis

Abstract

A model examining the National Water Wealth (NWW) and its allocation between the municipal sector and the agricultural sector, where water value is defined as the present value of Water Rights, is presented. Five factors are considered: (i) uncertainty of water supply; (ii) population growth rate; (iii) the effect of time on NWW without new water production; (iv) agency costs, and; (v) production of new waters. The work is based on the model by Jensen and Meckling (J Finance Econ. 3:305–360, 1976), dealing with the effects of agency costs on the value of public companies. Agency costs are subject to conflicting interests between managers, shareholders and bondholders. In the water economy agency, costs stem from a divergence of interests between the government, the agricultural and the municipal sectors. Uncertainty of supply reduces water wealth of both sectors, with a stronger adverse impact on water wealth of the agricultural sector. Our model shows how production of new waters can have contributive effects on national water wealth. The modeling demonstrates the option of reducing the overall uncertainty of water supply and production of new waters which leads to favorable effects on the national water wealth.