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Assessing the economic viability of alternative water resources in water scarce regions: The roles of economic valuation, cost–benefit analysis and discounting

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  • Birol, Ekin
  • Koundouri, Phoebe
  • Kountouris, Yiannis

Abstract

This paper demonstrates a comprehensive methodology to assess the viability of an environmental management plan which has long-run economic and ecological impacts. The case study under consideration is the implementation of a water resource management plan in a water scarce region of the world, namely Cyprus. Specifically this plan proposes to replenish a depleting aquifer with treated wastewater. The methodology proposed first identifies the key stakeholder groups, namely farmers and the general public, who are hypothesized to derive economic values (benefits) from the implementation of this plan, and then implements stated preference methods to capture the total economic value of these benefits. Benefits are aggregated over the relevant populations of these stakeholder groups and weighed against the total costs of implementing this plan in a long-run cost-benefit analysis (CBA). An econometrically estimated time declining trajectory of discount rates is used for the CBA in order to assess the long run sustainability of the plan. The results reveal that the net benefit trajectory estimated with the time declining discount rate takes thrice as long to come to a plateau, revealing the importance of using declining discount rates, as well as capturing the entirety of benefits generated by such plans. This methodology is recommended especially for the implementation of the EU Water Framework Directive which advocates the use of the CBA and consideration of the notion of sustainability for the achievement of the good water status for all European waters.

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File URL: http://purl.umn.edu/51692
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Bibliographic Info

Paper provided by International Association of Agricultural Economists in its series 2009 Conference, August 16-22, 2009, Beijing, China with number 51692.

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Date of creation: 2009
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Handle: RePEc:ags:iaae09:51692

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Related research

Keywords: Aquifer recharge; Treated Wastewater; Total Economic Value; Choice Experiment; Long-run Cost Benefit Analysis; Declining Discounting; Environmental Economics and Policy; Resource /Energy Economics and Policy;

References

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  1. Newell, Richard G. & Pizer, William A., 2003. "Discounting the distant future: how much do uncertain rates increase valuations?," Journal of Environmental Economics and Management, Elsevier, vol. 46(1), pages 52-71, July.
  2. GOLLIER Christian & KOUNDOURI Phoebe & PANTELIDIS Theologos, 2008. "Declining Discount Rates : Economic Justifications and Implications for Long-Run Policy," LERNA Working Papers 08.17.261, LERNA, University of Toulouse.
  3. Sergio Colombo & Nick Hanley & Javier Calatrava-Requena, 2005. "Designing Policy for Reducing the Off-farm Effects of Soil Erosion Using Choice Experiments," Journal of Agricultural Economics, Wiley Blackwell, vol. 56(1), pages 81-95.
  4. Othman, Jamal & Bennett, Jeff & Blamey, Russell, 2004. "Environmental values and resource management options: a choice modelling experience in Malaysia," Environment and Development Economics, Cambridge University Press, vol. 9(06), pages 803-824, December.
  5. Bergmann, Ariel & Hanley, Nick & Wright, Robert, 2006. "Valuing the attributes of renewable energy investments," Energy Policy, Elsevier, vol. 34(9), pages 1004-1014, June.
  6. Martin L. Weitzman, 2007. "Subjective Expectations and Asset-Return Puzzles," American Economic Review, American Economic Association, vol. 97(4), pages 1102-1130, September.
  7. Weitzman, Martin L., 1998. "Why the Far-Distant Future Should Be Discounted at Its Lowest Possible Rate," Journal of Environmental Economics and Management, Elsevier, vol. 36(3), pages 201-208, November.
  8. Ekin Birol & Phoebe Koundouri & Yiannis Kountouris, 2008. "Integrating Wetland Management into Sustainable Water Resources Allocation: The Case of Akrotiri Wetland in Cyprus," Journal of Environmental Planning and Management, Taylor & Francis Journals, vol. 51(1), pages 37-53.
  9. Gollier, Christian, 2002. "Discounting an uncertain future," Journal of Public Economics, Elsevier, vol. 85(2), pages 149-166, August.
  10. Paul R. Portney, 1994. "The Contingent Valuation Debate: Why Economists Should Care," Journal of Economic Perspectives, American Economic Association, vol. 8(4), pages 3-17, Fall.
  11. Hepburn, Cameron & Koundouri, Phoebe & Panopoulou, Ekaterini & Pantelidis, Theologos, 2009. "Social discounting under uncertainty: A cross-country comparison," Journal of Environmental Economics and Management, Elsevier, vol. 57(2), pages 140-150, March.
  12. Gollier, Christian, 2002. "Time Horizon and the Discount Rate," Journal of Economic Theory, Elsevier, vol. 107(2), pages 463-473, December.
  13. Martin L. Weitzman, 2007. "A Review of the Stern Review on the Economics of Climate Change," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 703-724, September.
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Cited by:
  1. Ekin Birol & Sukanya Das, 2010. "The Value of Improved Public Services: An Application of the Choice Experiment Method to Estimate the Value of Improved Wastewater Treatment Infrastructure in India," Working Papers 2010-051, Madras School of Economics,Chennai,India.

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