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Urban water management: optimal price and investment policy under climate variability

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  • Neal Hughes
  • Ahmed Hafi
  • Tim Goesch
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    Abstract

    Australian urban water utilities face a significant challenge in designing appropriate demand management and supply augmentation policies in the presence of significant water scarcity and climate variability. This article considers the design of optimal demand management and supply augmentation policies for urban water. In particular, scarcity pricing is considered as a potential alternative to the predominant demand management policy of water restrictions. A stochastic dynamic programming model of an urban water market is developed based on data from the ACT region. Given a specification of the demand and supply for urban water state dependent optimal price and investment policies are estimated. The results illustrate how the optimal urban water price varies inversely with the prevailing storage level and how the optimal timing of investment differs significantly between rain dependent and rain independent augmentation options. Copyright 2009 The Authors. Journal compilation 2009 Australian Agricultural and Resource Economics Society Inc. and Blackwell Publishing Asia Pty Ltd.

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    File URL: http://hdl.handle.net/10.1111/j.1467-8489.2007.00446.x
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    Bibliographic Info

    Article provided by Australian Agricultural and Resource Economics Society in its journal Australian Journal of Agricultural and Resource Economics.

    Volume (Year): 53 (2009)
    Issue (Month): 2 (04)
    Pages: 175-192

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    Handle: RePEc:bla:ajarec:v:53:y:2009:i:2:p:175-192

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    Postal: AARES Central Office Manager, Crawford School of Public Policy, ANU, Canberra ACT 0200
    Phone: 0409 032 338
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    Web page: http://onlinelibrary.wiley.com/journal/10.1111/(ISSN)1467-8489
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    References

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    1. Geoff Edwards, 2006. "Whose Values Count? Demand Management for Melbourne's Water," The Economic Record, The Economic Society of Australia, vol. 82(s1), pages S54-S63, 09.
    2. David Hensher & Nina Shore & Kenneth Train, 2006. "Water Supply Security and Willingness to Pay to Avoid Drought Restrictions," The Economic Record, The Economic Society of Australia, vol. 82(256), pages 56-66, 03.
    3. R. Quentin Grafton & Michael B. Ward, 2008. "Prices versus Rationing: Marshallian Surplus and Mandatory Water Restrictions," The Economic Record, The Economic Society of Australia, vol. 84(s1), pages S57-S65, 09.
    4. Page, Sharon & Hafi, Ahmed & Beare, Stephen, 2007. "Urban Water Options Contracts - Rural to Urban Water Trade," 2007 Conference (51st), February 13-16, 2007, Queenstown, New Zealand 10398, Australian Agricultural and Resource Economics Society.
    5. Hughes, Neal & Hafi, Ahmed & Goesch, Tim & Brownlowe, Nathan, 2008. "Urban water management: optimal price and investment policy under uncertainty," 2008 Conference (52nd), February 5-8, 2008, Canberra, Australia 6005, Australian Agricultural and Resource Economics Society.
    6. Xayavong, Vilaphonh & Burton, Michael P. & White, Benedict, 2008. "Estimating Urban Residential Water-Demand With Increasing Block Prices: The Case of Perth, Western Australia," 2008 Conference (52nd), February 5-8, 2008, Canberra, Australia 6010, Australian Agricultural and Resource Economics Society.
    7. John Quiggin, 2006. "Urban water supply in Australia: the option of diverting water from irrigation," Murray-Darling Program Working Papers WP3M06, Risk and Sustainable Management Group, University of Queensland.
    8. Mark Hoffman & Andrew Worthington & Helen Higgs, 2005. "Modelling residential water demand with fixed volumetric charging in a large urban municipality: The case of Brisbane, Australia," School of Economics and Finance Discussion Papers and Working Papers Series 196, School of Economics and Finance, Queensland University of Technology.
    9. Donna Brennan & Sorada Tapsuwan & Gordon Ingram, 2007. "The welfare costs of urban outdoor water restrictions," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 51(3), pages 243-261, 09.
    10. Jasper M. Dalhuisen & Raymond J. G. M. Florax & JHenri L. F. de Groot & Peter Nijkamp, 2003. "Price and Income Elasticities of Residential Water Demand: A Meta-Analysis," Land Economics, University of Wisconsin Press, vol. 79(2), pages 292-308.
    11. Grafton, R. Quentin & Kompas, Tom, 2002. "Pricing Sydney water," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 51(3), September.
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